Unit 4ab224 Microeconomics Unit 4 Assignment Elasticity Of D

Unit 4ab224 Microeconomicsunit 4 Assignment Elasticity Of Demandnam

Analyze the questions related to marginal utility, price elasticity of demand, income elasticity of demand, and their implications in consumer behavior and market responses. The task involves evaluating utility maximization, calculating elasticity metrics, and interpreting how changes in price and income influence demand and total revenue.

Paper For Above instruction

Microeconomic theory explores how consumers allocate their limited resources to maximize satisfaction, a concept fundamentally linked to marginal utility and elasticity measures. This paper discusses these core concepts through practical application questions involving consumer choice, elasticity calculations, and market response interpretations. These explores serve as critical tools for understanding demand behavior and informing business and policy decisions.

1. Utility Maximization and Consumer Choice

Jane’s scenario vividly illustrates the principle of utility maximization and the Law of Diminishing Marginal Utility. When consumers allocate their budgets across different goods, they aim to equalize the marginal utility per dollar spent on each item, achieving maximum overall satisfaction. To determine if Jane is maximizing her utility with her current consumption, we analyze her marginal utility per dollar for each item purchased at each stage.

Suppose Jane’s marginal utility scores for each purchase are as follows: First sandwich MU = 80, Fries MU = 50; second sandwich MU = 60, Fries MU = 40; third sandwich MU = 40, Fries MU = 30. Prices are fixed at $4 for a sandwich and $2 for fries, with a total budget of $20.

Calculating marginal utility per dollar:

  • First sandwich MU per dollar = 80/4 = 20
  • First fries MU per dollar = 50/2 = 25
  • Second sandwich MU per dollar = 60/4 = 15
  • Second fries MU per dollar = 40/2 = 20
  • Third sandwich MU per dollar = 40/4 = 10
  • Third fries MU per dollar = 30/2 = 15

Optimal consumer choice occurs when the last dollar spent on each good provides equal marginal utility, meaning Jane should compare these ratios. Initially, spending on fries appears more satisfying per dollar, suggesting reallocating funds toward more fries maximizes utility. If Jane's current consumption prioritizes higher MU per dollar (e.g., fries), she might increase overall satisfaction by adjusting quantities accordingly.

2. Utility Maximization and Adjustment Strategies

To evaluate if Jane is truly maximizing her utility, we consider whether reallocating her budget toward more fries (which have higher MU per dollar) would increase her total utility, considering the Law of Diminishing Marginal Utility. If she currently has more sandwiches than optimal, substituting one less sandwich with an additional fry could enhance her total satisfaction.

Suppose Jane’s current expenditure is $12 on sandwiches (3 units) and $8 on fries (4 units). If marginal utility per dollar for the last sandwich is 10 and for fries is 15, reallocating spending to buy fewer sandwiches, say 2 units ($8), and 5 units of fries ($10), might provide a higher total utility, assuming the MU per dollar for fries remains higher on the margin than for sandwiches.

This strategic reallocation aligns with consumer theory, suggesting that consumers redistribute their budgets where marginal utility per dollar is highest until a point of equilibrium is reached.

3. Price and Income Elasticity of Demand: The Gondwanaland Case

Analyzing demand elasticity involves measuring the responsiveness of quantity demanded to changes in price or income. Using the midpoint method, the price elasticity of demand (PED) between year 107 and 108 for gondwanaland gosum berries can be calculated as follows:

Change in quantity demanded = (600 - 700) / [(600 + 700)/2] = -100 / 650 ≈ -0.1538

Change in price = ($84 - $70) / [($84 + $70)/2] = $14 / $77 ≈ 0.1818

PED = the absolute value of [(change in quantity demanded) / (change in price)] ≈ |-0.1538 / 0.1818| ≈ 0.846

This elasticity indicates inelastic demand: a 1% increase in price leads to roughly a 0.85% decrease in quantity demanded. Since demand is inelastic (PED

The total monthly revenue for year 107 is $70 700 = $49,000, and for year 108, it is $84 600 = $50,400. The increase in revenue despite reduced quantity demanded aligns with inelastic demand characteristics.

These calculations demonstrate the importance of elasticity in predicting revenue responses to price changes, with inelastic demand leading to revenue gains when prices increase.

4. Elasticity of Demand and Market Responses

Regarding Altair chariots, a price elasticity of demand of 3 implies high sensitivity: a 20% price increase will induce a 60% decline in demand (since elasticity = % change in quantity / % change in price; thus, 3 = -% change in quantity / 20%), following the formula:

Percentage change in quantity demanded = -Elasticity % change in price = -3 20% = -60%

This confirms the statement’s accuracy; demand will fall significantly. Conversely, given the high price elasticity, an income increase causing demand to rise is consistent with the positive income elasticity of 2, meaning that as income increases, demand for Altair chariots increases proportionally, reflecting their status as normal goods.

In conclusion, understanding these elasticities helps firms predict demand changes, optimize pricing strategies, and anticipate market responses to economic shifts.

References

  • Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage Learning.
  • Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
  • Krugman, P., & Wells, R. (2018). Microeconomics (5th ed.). Worth Publishers.
  • Investopedia. (2023). Price Elasticity of Demand. Retrieved from https://www.investopedia.com/terms/p/priceelasticityofdemand.asp
  • McConnell, C. R., Brue, S. L., & Flynn, S. M. (2021). Microeconomics (22nd ed.). McGraw-Hill Education.
  • Baumol, W. J., & Blinder, A. S. (2015). Economics: Principles and Policy (13th ed.). Cengage Learning.
  • Marshall, A. (1920). Principles of Economics. Palgrave Macmillan (Original work published 1890).
  • Samwick, A. A. (2018). Income and Price Elasticities. Journal of Economic Perspectives, 32(2), 38–56.
  • Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
  • Perloff, J. M. (2019). Microeconomics (8th ed.). Pearson.

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