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i. Explain why the estimated values for price elasticity of demand differ.
ii. Compute what will happen to ridership and revenue over the next few months if you decide to raise fares by 5%.
iii. Compute what will happen to ridership and revenue over the next few years if you decide to raise fares by 5%.
iv. What happens to total revenue now and after several years if you choose to raise fares?
Unit of each good 1 2 3 4 5 6 7 8 9 10
Mux 12 11 10 9 8 7 3 0 -2 -6
MUy 60 55 48 40 27 21 19 18 9 0
MUz 70 60 50 45 30 25 18 10 0 -5
a) If the three goods were “free” or no budget constraint.
b) If respective prices are Px= 1 Birr, Py=3 Birr and Pz=5 Birr
what is elasticity of demand?
A college student has two options for meals: eating at the dining hall for BDT 6 per
meal, or eating a Star Kabab for BDT 1.50 per meal. Her weekly food budget is BDT
60.
a. Draw the budget constraint showing the trade-off between dining hall meals and Star
Kabab. Assuming that she spends equal amounts on both goods, draw an indifference
curve showing the optimum choice. Label the optimum as point A.
b. Suppose the price of a Star Kabab now rises to BDT 2. Using your diagram from part
(a), show the consequences of this change in price. Assume that our student now spends
only 30 percent of her income on dining hall meals. Label the new optimum as point B.
c. What happened to the quantity of Star Kabab consumed as a result of this price change?
What does this result say about the income and substitution effects? Explain.
d. Use points A and B to draw a demand curve for Star Kabab. What is this type of good
called?
4. Consider a consumer who is choosing how many of two goods to buy: Footballs and cricket balls. The consumer has an income of $20, and the cost of a football is $4 and a cricket ball is $2.
(a) Write down the equation for the consumer’s budget constraint and graph it.
(b) The government decides that football is evil and needs to be taxed. They introduce a 50% tax on each football sold. Rewrite and re-graph the budget constraint.
(c) A new government is elected that hates all sports. They now tax both footballs and cricket balls at 50%. What does the budget constraint look like now?
5. Suppose a consumer’s utility function is given a U = 100X0.25Y0.75.The prices of the two commodities X and Y are Birr 2 and Birr 5 per unit respectively. If the consumer’s income isBirr 280, how many units of each commodity should the consumer buy to maximize his/her utility?
If the number of people with the skills necessary to perform a job increases, labor ________ shifts to the ________.
a. demand; left
b. demand; right
c. supply; left
d. supply; right
1.1 In the absence of any government intervention what is the equilibrium level of security that airlines will supply? Using the diagram, denote this level, Q*. Briefly explain why this quantity is not the economically efficient level of aviation security.
Stagnation is best characterised by? and can be solved by?
