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Assignment:

In this Assignment, you will focus on marginal utility, Price Elasticity of Demand, and understanding the difference between Price Elasticity of Demand and Income Elasticity of Demand.

We all subconsciously assign "scores" to what we are considering to purchase, based on our expected level of "satisfaction" (Marginal Utility) with that purchase. When making simultaneous pairs of purchases, again we subconsciously compare the amount of "satisfaction" (Marginal Utility) that we will receive from the pair of purchases. To decide on the "ideal" combination of these two purchases, we expect that the last dollar we spend on each of the items will give us the "same" satisfaction per dollar (Marginal Utility per dollar). Further, we know that the MORE of an item that we get, the next one we get will give us LESS "satisfaction" (Marginal Utility) than the last one gave us (the Law of Diminishing Marginal Utility). Using what you have learned about Marginal Utility and Marginal Utility per dollar, answer the following questions.

Questions

1. Jane has been working all day, missing both her breakfast and lunch. Finally able to leave work, after being required to work a couple of overtime hours, she is starving. Jane has $20 in her pocket, so she stops at a local fast food restaurant and orders a grilled chicken sandwich and an order of fries. As she sits down to eat them, a University student approaches her and tells her that she is doing a research project for her microeconomics course, and would like to ask Jane a few quick questions. Jane agrees and the student asks what "score" (marginal utility) from 1 to 100 would she give as her satisfaction level with the 1st sandwich and the 1st fries? After eating that order, Jane is still hungry and orders a second chicken sandwich and another order of fries. Again, the student asks Jane to give her new scores. Since Jane has not eaten all day, she is hungry enough to order a third round of food and again gives "scores" to the inquisitive student.

Below is the University student's completed experiment tally sheet of Jane's marginal utility "scores" and the calculation of her marginal utility per dollar, given that each sandwich costs $4.00, and each order of fries costs $2.00. Her budget is $20.

The student filled in the shaded cells based on Jane's responses, then computed the values in the remaining cells. Using this information, answer the following questions:

Student's completed experiment tally sheet. Available budget is $20.

Order of mu (score) from 1 to 100 Price of each

$4.00 Money spent on Order of mu (score) from 1 to 100 Price of each

$2.00 Money spent on Total Money Spent Total Budget Remaining

Chicken Sandwich mu mu/$ Chicken Sandwich Fries mu mu/$ Fries 1st 100 25 $4.00 1st 50 25 $2.00 $6.00 $14.00

2nd 72 18 $4.00 2nd 20 10 $2.00 $12.00 $8.00

3rd 60 15 $4.00 3rd 6 3 $2.00 $18.00 $2.00

4th 4th Utility 232 Utility 76 Total utility for both 308 Total spent on Chicken Sandwiches $12.00 Total spent on fries $6.00 $18.00 $2.00

a. Is Jane maximizing her utility? Explain your reasoning and show any calculations. (2 points)

I believe that Jane is not maximizing her utility. The reason is that Jane is not consuming her entire budget. Besides, Jane is leaving a $2 balance that indicates that her utility is not being maximized. Secondly, after consuming her first fries and sandwich, Jane does not have a uniform marginal utility per dollar on the rest of her orders. The first fries and sandwich would attain this criterion, but her second and third would not. Additionally, the first fries and sandwich have a similar MU/$ of 2. The second fries and sandwich have MU/$ of 10 and 18 respectively. Lastly, the third fries and sandwich also have MU/$ 3 and 15 respectively. As it can be observed, the pattern is not similar for the second and third-order.

b. If Jane is not maximizing her utility, remembering the Law of Diminishing Marginal Utility, would she be better off to buy one less chicken sandwich and one moreorder of fries? Explain your reasoning and show any calculations. (2 points)

Jane's total utility is 308. If she were to purchase one sandwich less, then her utility would have added up to 76 from the 3 fries and 172 from the 2 sandwiches. From the observation, the Jane's total utility has fallen from 50 to 20 to 6. Applying the Law of Diminishing Marginal Utility, it outlines that the order for sandwich would continue to decrease (Krugman, 2015). For example, if the next fries would have been 2 then the sum for 4 fries would have increased to 78.

(2*4)+ (2*4)

= 8+8

=16

(Initial budget-calculated expenditure)

20-16= 4

Jane will still have a balance of $4 in her budget.

c. If Jane is not maximizing her utility with the original purchase combination, remembering the Law of Diminishing Marginal Utility, would she be better off buying just one moreorder of fries? Explain your reasoning and show any calculations. (2 points)

Jane will be better off by just purchasing one more fry applying her current consumption bundle combination.

Total budget = (3*12) + (4*2)

= 12+8

= 20.

This result outlines that Jane's total budget is exhausted. This result is the secondary condition of applying utility of maximization where MUX/PX = MUy/Py is the stipulated condition for the law of utility of maximization (Krugman, 2015).

d. If Jane is not maximizing her utility with the original purchase, remembering the Law of Diminishing Marginal Utility, would she be better off buying one lessorder of friesand one more chicken sandwich? Explain your reasoning and show any calculations. (2 points)

Jane would be better off buying one less fries and add one more chicken sandwich. The reason is that;

(4*4) + (2*2)

= 16 + 4 = 20

This calculation proves that Jane can indeed maximize her utility by purchasing one less fries and one more sandwich chicken.

2. Remembering the Learning Activity in Unit 3, in the year 107 WBCE (Way Before the Common Era) the Gondwanaland Chairman of Production reported that the gosum berry growers could meet an average demand of 700 barrels of gosum berries per month at an average a price of $70 per barrel.

In the year 108 WBCE, the growers were plagued with a gosum berry bug infestation that reduced average output, causing production to fall to only 600 barrels per month, causing the price to rise to $84 per barrel. The following table shows the Chairman's report:

Year (WBCE) Monthly barrels of gosum berries demanded Price per barrel

107 700 $70

108 600 $84

a. Using the midpoint method, calculate the price elasticity of demand for Gondwanaland gosum berries. Explain what this price elasticity of demand means? (6 points)

With reference to midpoint formula,

PED = {(Q2-Q1)/(Q2 +Q1)/2} / { (P2-P1) / (P2 +P1)/ 2}(Krugman, 2015).

The percentage change in Q = 0.1538

The percentage change in P = 0. 1818

Thus, the PED = -0.1538/0.1818

= -0.8462

Because this absolute value is <1, the demand for Gondwanaland berries would be positive. Besides, if there would be a 1% increase prices, then this increase will lead to the reduction in the demanded quality less than 1% (Krugman, 2015).

b. Complete the table below by calculating what the monthly average total revenue is for year 107, what the monthly average total revenue is for year 108, and the change in average total monthly revenue for these two years. How have these numbers changed? (4 points)

Year (WBCE) Monthly barrels of gosum berries demanded Price per barrel Change in

average total monthly revenue Monthly average total revenue

107 700 $70 $49000

108 600 $84 $50400

100 14 $1400 In the year 107, there were 700 barrels priced at $70 per barrel. The total cost of the barrels = (700*$70) = $49,000 per month on barrels. In the year 108, there were a total of 600 barrels priced at $84 per barrel. The total revenue in 108 = (600*84) = $50400 monthly. With the price hike, the company was in a position to increase more revenue and an average of 100 barrels per month. Thus, this product was elastic.

c. Using your answer to part a. above, how could you have predicted the change in total monthly revenue that you found in part b. above? (6 points)

Krugman (2015) noted that the larger elasticity of demand in price, the responsive demand in quantity to price. Since the elasticity of this price was about 1, it could be assumed that the sales would have responded with a slight increase that would be close to the initial monthly sales.

3. The Gondwanaland Chairman of Production reported that the new Altair chariots (most modern, horse drawn family chariot) had a PRICE elasticity of 3 and an INCOME elasticity of 2. The supply of these Altair chariots is elastic. Evaluate the following statements and explain why you think they are true, or false.

a. A 20% increase in the price of the Altair chariot will cause the quantity demanded to fall by an astounding 60%. (4 points)

Price elasticity = (Percentage change in quantity demanded/ Percentage change in price) (Krugman, 2015).

The change in demand = 60%

The change in price = 20%

60/20 = 3. Thus, 3 is the price elasticity.

Because the curve indicates that an increase in price results into a decrease in demand. I do agree with the calculation.

b. An increase in Gondwanaland consumers' incomes will cause prices to rise, but the total quantity demanded will also increase. (4 points)

Income elasticity = (Percentage change in quantity demanded/ Percentage change in income) (Krugman, 2015). However, I would conclude that this calculation is false. The reason is because the income elasticity is 2, but an increase in income would result into an increase in demand. Nevertheless, the alteration is price cannot be evaluated by income elasticity.

_________________

References:

Krugman, P. (2015). Microeconomics: 4th ed. Retrieved from https://kaplan.vitalsource.com/#/books/9781464144820/cfi/4!/4/[email protected]:0.00

Unit 4 Assignment: Elasticity of Demand Possible Points Points Earned

Overall Writing: 8

Used correct file name in uploading assignment document. 1

Demonstrated concerted effort to utilize material from the textbook and/or seminars to answer questions. 3

Correctly formatted in-text citations and listed at least ONE reference. 3

Used standard English with few or no grammatical errors. 1

Individual Questions: 32

1.a. Correctly determined and explained, if utility is maximized at 3 sandwiches and 3 fries. 2

1.b. Correctly determined and explained, if utility is maximized at 2 sandwiches and 4 fries. 2

1.c. Correctly determined and explained, if utility is maximized at 3 sandwiches and 4 fries. 2

1.d. Correctly determined and explained, if utility is maximized at 4 sandwiches and 2 fries. 2

2.a....