Unit 4 Assignment: Elasticity

Unit 4 [BU224 Assignment Template] Unit 4 Assignment: Elasticity of Demand

Analyze the concepts of marginal utility, price elasticity of demand, income elasticity of demand, and their applications through specific scenarios involving consumer choices and market data. The assignment includes examining Jane's utility maximization from food purchases, calculating price elasticity of demand for gosum berries, and evaluating responses related to Altair chariots' demand responsiveness to price and income changes.

Answer all questions thoroughly, demonstrating understanding of economic principles with appropriate calculations, explanations, and supporting references using APA format. Your response should be well-organized, integrated with relevant economic theories, and include contextually appropriate examples.

Paper For Above instruction

Analyzing consumer decision-making and elasticity theories offers critical insights into how individuals and markets respond to changing prices and income levels. The case of Jane's food choices illuminates the principles of diminishing marginal utility and utility maximization, while market data on gosum berries exemplifies the calculation of price elasticity of demand and its implications for revenue. Additionally, the demand responsiveness of Altair chariots demonstrates the significance of elasticity in forecasting market reactions to price and income fluctuations.

Introduction

Microeconomic theory centers around understanding consumer behavior and market dynamics, particularly how consumers allocate limited resources among various goods to maximize their utility. Marginal utility, a measure of additional satisfaction from consuming an extra unit, plays a pivotal role in decision-making. When combined with price and income sensitivities—embodied in price elasticity of demand (PED) and income elasticity of demand (YED)—these concepts help predict how changes in prices and income influence demand and market outcomes. This paper explores these themes through three specific scenarios: consumer utility maximization in food choices, the demand elasticity of gosum berries, and the responsiveness of Altair chariot demand to market variables.

Consumer Utility and Marginal Utility: Jane's Food Choices

Jane's food consumption scenario exemplifies key principles of utility theory, including the Law of Diminishing Marginal Utility and the utility maximization rule. According to the law, as consumers acquire more units of a good, the additional satisfaction from each successive unit declines. Jane's initial response to her hunger—ordering a chicken sandwich and fries—indicates her preference and satisfaction levels at different intake levels, captured through marginal utility scores.

Her total expenditure of $18 out of $20 budget aligns her consumption choices with the goal of maximizing utility. To determine if Jane is efficiently allocating her budget, we consider the principle that, at maximum utility, the last dollar spent on each good should provide equal marginal utility per dollar. From the data provided, her marginal utility per dollar decreases with each additional unit, reflecting diminishing marginal utility. Calculations show that the marginal utility per dollar for her initial purchases was higher compared to her last, indicating potential room for optimization.

The question of whether Jane is maximizing her utility hinges on comparing the marginal utility per dollar for her last units of food. Since her remaining budget of $2 cannot purchase an additional item, evaluating the marginal utility per dollar for nearby consumption levels suggests she might improve her total utility by adjusting her purchase pattern. For instance, buying one less chicken sandwich and one more fries could equilibrate the marginal utility per dollar across items, aligning with the utility maximization condition. This realignment leverages the Law of Diminishing Marginal Utility, suggesting she would gain more utility with optimal distribution of her remaining funds.

Extending this, purchasing just one more fry could enhance total utility if the marginal utility per dollar for fries exceeds that for the last chicken sandwich purchased. Conversely, reducing the number of fries purchased might be beneficial if the marginal utility per dollar for fries is lower, indicating that reallocating spending towards more of the better-valued good increases overall satisfaction. These adjustments exemplify the importance of marginal analysis in consumer choice and resource allocation.

Elasticity of Demand for Gosum Berries

Thegosum berry market data illustrates how elasticity measures responsiveness of demand to price changes. Using the midpoint method, the price elasticity of demand (PED) between the two years can be calculated. Given the decrease in demand from 700 to 600 barrels and the corresponding price increase from $70 to $84, the calculation involves the percentage change in quantity and price, divided by their midpoint averages.

Applying the midpoint formula: PED = [(Q2 - Q1) / ((Q2 + Q1) / 2)] ÷ [(P2 - P1) / ((P2 + P1) / 2)]

Substituting the values: PED = [(600 - 700) / 650] ÷ [($84 - $70) / $77] = (-100/650) ÷ (14/77) ≈ -0.1538 ÷ 0.1818 ≈ -0.846

The negative sign indicates an inverse relationship between price and demand, characteristic of typical demand curves. The absolute value, approximately 0.846, signifies demand is relatively inelastic; demand decreases by less than the percentage increase in price.

Next, total revenue analysis reveals that, despite higher prices, total revenue declined from $49,000 (700 barrels × $70) to $50,400 (600 barrels × $84), reflecting the elasticity calculation’s implications. The increase in revenue aligns with the elastic nature of demand, where a price increase can lead to revenue growth depending on the elasticity value.

Predicting changes in total revenue based on elasticity involves understanding whether demand is elastic (PED > 1), inelastic (PED

Price and Income Elasticities: The Altair Chariot Market

The Altair chariots demonstrate the combined effect of price and income elasticities. A price elasticity of 3 implies that a 1% change in price causes a 3% change in quantity demanded. Therefore, a 20% price increase results in a 60% decrease in demand, consistent with a highly elastic demand. This indicates consumers are highly responsive to price changes, likely due to the availability of substitutes or the luxury nature of the good.

Similarly, an income elasticity of 2 denotes that a 1% increase in income causes a 2% rise in demand. An income increase will lead to higher demand and potentially higher prices if supply is elastic. Because demand is highly responsive both to price and income, market strategies for such goods should carefully consider these elasticities to forecast sales and revenue accurately.

In conclusion, understanding these elasticities informs businesses and policymakers about potential effects of pricing and income changes. High price elasticity suggests that competitive pricing strategies will significantly influence demand, while high income elasticity indicates the good is income-sensitive, affecting demand as consumers' financial capabilities fluctuate.

Conclusion

Microeconomic principles involving marginal utility, price, and income elasticity are fundamental to comprehending individual and market behavior. Through the analysis of Jane's utility-maximizing choices, demand elasticity of gosum berries, and Altair chariots' responsiveness, we see how theoretical concepts translate into real-world market phenomena. Recognizing demand responsiveness enables better decision-making for producers, consumers, and policymakers, fostering efficient resource allocation and strategic planning in dynamic markets.

References

  • Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
  • Perloff, J. M. (2019). Microeconomics (8th ed.). Pearson.
  • Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
  • Krugman, P., & Wells, R. (2020). Microeconomics (6th ed.). Worth Publishers.
  • Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and Policy (13th ed.). Cengage Learning.
  • Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
  • Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton & Company.
  • Arrow, K. J. (2012). Social Choice and Individual Values. Yale University Press.
  • Friedman, M. (2002). Price Theory: A Provisional Text. Robert E. Krieger Publishing Company.
  • Gordon, R. J. (2016). The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War. Princeton University Press.

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