Assignment: Elasticity of Demand
General Instructions:
1. Unless specified differently by your course instructor, save this assignment template to your computer with the following file naming format:
Course number_section number_last name_first name_unit number
Example: BU224_Section02_David_Alex_Unit1
2. At the top of the template, insert the appropriate information: Your name, course number and section, and the date.
3. Insert your answers in the appropriate space provided for the question. Your answers should
a. follow current APA format with citations to your sources,
b. include a list of references at the bottom of your last page,
c. be in Standard English with correct spelling, punctuation, grammar, and style,
d. be double-spaced,
e. be formatted in Times New Roman,12-point, black font, and
f. respond to questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions.
4. Upload the completed assignment to the appropriate Dropbox.
5. Any questions about the assignment or format should be directed to your course instructor.
Assignment:
In this assignment, you will focus on marginal utility, price elasticity of demand, and understanding the difference between price elasticity of demand and income elasticity of demand.
You subconsciously assign “scores” to what you are considering purchasing, based on the expected level of satisfaction (marginal utility) with that purchase. When making simultaneous pairs of purchases, again, you subconsciously compare the amount of satisfaction (marginal utility) that you will receive from the pair of purchases. To decide on the ideal combination of these two purchases, you expect that the last dollar you spend on each of the items will give us the same satisfaction per dollar (marginal utility per dollar). Further, you know that the MORE of an item that you get, the next one you get will give you LESS satisfaction (marginal utility) than the last one gave you (the law of diminishing marginal utility). Using what you have learned about marginal utility and marginal utility per dollar, answer the following questions.
Questions
1. Jane has been working all day, missing both her breakfast and lunch. Finally able to leave work, after being required to work a couple of overtime hours, she is starving. Jane has $20 in her pocket, so she stops at a local fast food restaurant and orders a grilled chicken sandwich and an order of fries. As she sits down to eat them, a university student approaches her and tells her that she is doing a research project for her microeconomics course and would like to ask Jane a few quick questions. Jane agrees, and the student asks what “score” (marginal utility) from 1 to 100 would she give as her satisfaction level with the first sandwich and the first fries? After eating that order, Jane is still hungry and orders a second chicken sandwich and another order of fries. Again, the student asks Jane to give her new scores. Since Jane has not eaten all day, she is hungry enough to order a third round of food and again gives “scores” to the inquisitive student.
Below is the university student’s completed experiment tally sheet of Jane’s marginal utility “scores” and the calculation of her marginal utility per dollar, given that each sandwich costs $4.00, and each order of fries costs $2.00. Her budget is $20.
The student filled in the shaded cells based on Jane’s responses, then computed the values in the remaining cells. Using this information, answer the following questions.
Student’s completed experiment tally sheet. Available budget is $20.
Order of mu (score) from 1 to 100 Price of each
$4.00
Money spent on Order of mu (score) from 1 to 100 Price of each
$2.00 Money spent on
Total Money Spent
Total Budget Remaining
Chicken Sandwich mu mu/$ Chicken Sandwich Fries mu mu/$ Fries
1st 100 25 $4.00 1st 50 25 $2.00 $6.00 $14.00
2nd 72 18 $4.00 2nd 20 10 $2.00 $12.00 $8.00
3rd 60 15 $4.00 3rd 6 3 $2.00 $18.00 $2.00
4th 4th
Utility 232 Utility 76
Total spent on chicken sandwiches: $12
Total spent on fries: $6.00
Total money spent: $18.00
Total budget remaining: $2.00
Marginal utility per dollar for chicken sandwiches of the last item purchased: 15 mu/$
Marginal utility per dollar for fries of the last item purchased: 3 mu/$
Total utility for both: 308
a. Is Jane maximizing her utility? Explain your reasoning and show any calculations.
(Enter your response here.)
b. If Jane is not maximizing her utility, remembering the law of diminishing marginal utility, would she be better off to buy one less chicken sandwich and one more order of fries? You will need to enter a number for marginal utility, based upon the law of diminishing marginal utility, for an additional order of fries. Be sure to explain your reasoning and show your calculations.
(Enter your response here.)
c. If Jane is not maximizing her utility with the original purchase combination, remembering the law of diminishing marginal utility, would she be better off buying just one more order of fries? You will need to enter a number for marginal utility, based upon the law of diminishing marginal utility, for an additional order of fries. Be sure to explain your reasoning and show your calculations.
(Enter your response here.)
d. If Jane is not maximizing her utility with the original purchase, remembering the law of diminishing marginal utility, would she be better off buying one less order of fries and one more chicken sandwich? You will need to enter a number for marginal utility, based upon the law of diminishing marginal utility, for an additional chicken sandwich. Be sure to explain your reasoning and show your calculations.
(Enter your response here.)
2. Remembering the learning activity in Unit 3, the Gondwanaland chairman of production reported that the gosum berry growers could meet a demand of 700 barrels of gosum berries per month at a price of $70 per barrel.
Then the growers were plagued with a gosum berry bug infestation that reduced output, causing production to fall to only 600 barrels. This resulted in a price increase to $84 per barrel. The following table shows the chairman’s report:
Month Monthly barrels of gosum berries demanded Price per barrel
June 700 $70
July 600 $84
a. Using the midpoint method, show your work and calculate the price elasticity of demand for Gondwanaland gosum berries. Explain what this price elasticity of demand means?
(Enter your response here.)
b. Complete the table below by calculating what the monthly total revenue is for June, what the monthly total revenue is for July, and the change in total monthly revenue for these two months. How have these numbers changed?
(Enter your response here.)
Month Monthly barrels of gosum berries demanded Price per barrel Monthly total revenue
(Enter Totals Below)
June 700 $70 (Enter monthly total revenue here)
July 600 $84 (Enter monthly total revenue here)
Change in monthly total revenue:
(Enter change in monthly total revenue here.)
c. Using your answer to part a. above, how could you have predicted the change in monthly total revenue that you found in part b. above?
(Enter your response here.)
3. The Gondwanaland chairman of production reported that the new Altair chariots (most modern, horse-drawn family chariot) had a PRICE elasticity of 3 and an INCOME elasticity of 2. The supply of these Altair chariots is elastic. Evaluate the following statements and identify whether each statement is true or false and explain how you used the appropriate elasticity to help you determine your answer.
a. If there is a 20% increase in the price of the Altair chariot, Gondwanaland can predict the quantity demanded to fall by an astounding 60%.
(Enter your response here.)
b. An increase in Gondwanaland consumers’ incomes will cause prices to rise, but the total quantity demanded will also increase.
(Enter your response here.)
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References:
Author. (Date.) Title. Source.
