Microeconomics Unit 5 Assignment Elasticity Of Demand

Unit 5ab224 Microeconomicsunit 5 Assignment Elasticity Of Demand An

Calculate the price elasticity of demand, demonstrate an understanding of consumer choices based on marginal utilities, consumer surplus, and analyze how buying decisions and consumer surplus change with different pricing schemes.

Paper For Above instruction

Microeconomics examines how individual consumers and firms make decisions based on scarcity and utility. One of the key concepts is elasticity of demand, which measures how responsive the quantity demanded of a good is to a change in its price. Understanding elasticity helps firms set prices optimally and policymakers understand the implications of taxation and regulation. Additionally, the theory of consumer choice, involving marginal utility and consumer surplus, explains how consumers allocate their limited income among various goods to maximize their satisfaction.

1. Elasticity of Demand for Gosum Berries in Gondwanaland

The demand schedule for gosum berries indicates how quantity demanded varies with price. Using the midpoint method to calculate price elasticity of demand provides a more accurate measure across different price ranges.

a. When the price increases from $10 to $20, suppose the demand decreases from 100 to 50 barrels (hypothetically assigning values from a typical demand trend). The midpoint elasticity formula is:

Elasticity = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)]

Assuming Q1 = 100, Q2 = 50, P1 = $10, P2 = $20:

Elasticity = [(50 - 100) / (75)] / [(20 - 10) / (15)] = (-50 / 75) / (10 / 15) = (-0.6667) / (0.6667) = -1

The absolute value, 1, indicates unit elastic demand at this price range. This implies that a 1% increase in price results in a 1% decrease in quantity demanded.

b. For the rise from $70 to $80, if demand decreases from 20 to 10 barrels (again using hypothetical data):

Elasticity = [(10 - 20) / (15)] / [(80 - 70) / (75)] = (-10 / 15) / (10 / 75) = (-0.6667) / (0.1333) ≈ -5

This suggests demand is highly elastic at higher price points, and consumers are very responsive to price changes in this range.

c. The variation in elasticity estimates along the demand curve occurs because elasticity is not constant; it depends on the point on the demand curve. Typically, demand tends to be more elastic at higher prices and less elastic at lower prices, because consumers are more sensitive to price changes when prices are high but less so when prices are low.

2. Consumer Utility Maximization: Matilda's Downloads

Matilda's case involves marginal utilities for music and video downloads at a fixed price of $3 each, with the goal of maximizing total utility under budget constraints.

a. Utility maximization occurs when the last dollar spent on each good provides equal marginal utility. Matilda's current consumption is at 3 music downloads and 2 videos. Calculating marginal utility per dollar for each — if the MU per dollar for the last music download (MU/M) is equal to that for videos, then utility is maximized. For instance, if MU of 3rd music download is 9, MU of 2nd video is 9, then MU per dollar is 3 for both, indicating optimality.

b. Should Matilda buy another video? If the MU per dollar for the last video exceeds that for music, she should buy more videos. Conversely, if it is less, she should buy fewer videos.

c. Adjusting consumption by decreasing music and increasing video downloads might better balance marginal utilities, moving toward a utility maximum. If the MU per dollar for movies exceeds that for videos, it indicates she should consume more movies.

d. If the MU per dollar for an additional music download is higher than for videos, purchasing one more music download will increase overall utility, moving her closer to the optimal point.

3. Brandon's Demand for Movie Rentals and Consumer Surplus

Brandon's willingness to pay for each rental skews how many rentals he will purchase at different prices. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.

a. At $3 per rental, Brandon will buy up to the point where willingness to pay drops below $3. For example, if his willingness to pay for the first rental is $10, second $8, and so on, total consumer surplus is the sum of individual surpluses for each rental he consumes.

b. At $5 per rental, Brandon's demand drops as fewer rentals have willingness to pay above $5. Consumer surplus decreases compared to the $3 scenario, but total expenditures may be higher or lower based on the number of rentals purchased.

c. With a subscription fee of $25 for unlimited rentals, Brandon's demand depends on his total willingness to pay for all Rentals combined. If his total willingness to pay exceeds $25, he will maximize utility by subscribing and enjoying the rentals, gaining consumer surplus value equal to his total willingness to pay minus the subscription fee.

d. At $35, the same logic applies, but if Brandon's total willingness to pay is less than $35, he will opt not to subscribe or rent more. Consumer surplus becomes negative if costs outweigh willingness to pay.

e. For the maximum one-time annual fee, it should be set at the total willingness to pay for all desired downloads, ensuring maximum revenue for Xanadu without deterring customers.

4. Types of Vending Machines and Utility

While vending machines providing a single paper or snack restrict access to only one item, those offering multiple items after a single payment enhance utility by maximizing consumer satisfaction. The difference stems from marginal utility: in machines offering multiple papers, once paid, consumers can access additional goods without extra costs, providing higher total utility. Conversely, single-item machines limit utility because each additional item requires a new payment, reducing overall satisfaction and making them less efficient from a consumer standpoint.

Conclusion

Understanding elasticity of demand aids in pricing strategies, while consumer choice theories involving marginal utility and consumer surplus illuminate individual decision-making processes. Analyzing these economic concepts highlights the importance of price sensitivity, utility maximization, and the impact of pricing schemes on consumer behavior, which are vital for firms and policymakers aiming to optimize market outcomes.

References

• Varian, H. R. (2014). _Intermediate Microeconomics: A Modern Approach_. W.W. Norton & Company.