Answer to Question #244533 in Microeconomics for james

Question

1. Explain why the concept of elasticity of demand should be of interest to those in business who have to make choices about the price at which to sell their products. 2. Explain why it is the marginal utility, rather than total utility, of a product that affects its elasticity. 3. Mr. Mars allocates his budget of $ 24 per week among three goods. Use the following table of marginal utilities for good A, good B, and good C to answer the questions below; Quantity in Units MUA MUB MUC 1 50 75 25 2 40 60 20 3 30 40 15 4 4 20 30 10 5 15 20 7.5 4. If the price of A is $2, the price of B is $3, and the price of C is $1, how much of each does Mr. Mars purchase in equilibrium? 5. If the price of A rises to $4, while other prices and Mr. Mars budget remains constant, how much of each does he purchase in equilibrium? 

Answer 1

1.

Price elasticity of demand shows consumers' sensitivity to changes in price. For instance, if a product's price increases by 1 unit, how many fewer units consumers would demand. Non-essentials tend to be price elastic - ie people buy less if price goes up. Essentials, such as medication, tends to be price inelastic - ie people buy regardless of price.

This information is important to suppliers because it allows them to optimize pricing of their products.

2.

Marginal utility is the consumer's extra satisfaction after consuming one more unit of the commodity, while total utility highlights the total satisfaction of the consumer.

The marginal utility has an advantage over total utility because of its ability to determine the choices made at the margin. It determines how much quantity the consumer is willing to sacrifice against his satisfaction if prices increase. Price affects the choice made by the consumer on the margin.

This cannot be derived in total utility as it calculates the overall satisfaction. It does not show the effect of choices made at the margin. The marginal utility shows the exact drop or rises in consumption after a particular change in prices. It also shows the point after which consumer's satisfaction starts declining. Thus, marginal utility is given more importance for determining optimal consumption

3.

In order to find out the consumers equilibrium in three commodity case, the following condition has to be satisfied which maximize the utility.

Where MU is the marginal utility and P is the price.

It is given that the price of A is $4 and the budget remains the same. Consider the table given below:

In the given case, the consumer purchase 2 units of good A and 4 units of good B and good C. in this way, he will be able to spend his whole income on purchase of three commodities and maximize his utility.