Week 3 Managerial Economics

Order of Business Homework Assigned Lectures Other Material Lectures for Next Week

Homework

Question 1. ( 20 points) (20%) Pashigian, p 41, Exercise 1-4

Question 2. ( 20 points) (20%) Pashigian, p 41, Exercise 1-5

Question 3. ( 10 points) (10%) A commodity has a demand function Q = p. Compute the point price elasticity when the Q = 20.

Point Elasticity of Demand The point elasticity of demand is defined by Where Slope is the slope of the demand function

Question 4. ( 10 points) (10%) A commodity has a demand function Q = p. Compute the arc price elasticity over the range Q = 20 to Q = 25.

Q = 100 – 2P P Q Arc Elasticity

Question 5. ( 10 points) (10%) A government study has concluded that the demand for a commodity is Price Quantity Compute the arc price elasticity when p changes from 12 to 16; when p changes from 16 to 12.

Question 5. ( 10 points) (10%) A government study has concluded that the demand for a commodity is Price Quantity Compute the arc price elasticity when p changes from 12 to 16; when p changes from 16 to 12.

Question 6. ( 15 points) (15%) What would be the shape of indifference curves between Cours and Budweiser Beers for someone who is believes "A beer is a beer is a beer "

Question 6. ( 15 points) (15%) What would be the shape of indifference curves between Cours and Budweiser Beers for someone who is believes "A beer is a beer is a beer " C B

First Example We are going to do some special cases to illustrate how some special indifference curves look. I don’t care whether you have Coke® or Pepsi®, as long as it is cola. This is a case we talked about earlier, corresponding to perfect substitutes.

Coke and Pepsi \ Coke Pepsi

Coke and Pepsi \ Coke Pepsi

Coke and Pepsi \ Coke Pepsi I1I1

Coke and Pepsi \ Coke Pepsi I1I1 I2I2

Coke and Pepsi \ Coke Pepsi I1I1 I2I2 I3I3

Question 7. ( 15 points) (15%) Explain why different people can have different indifference curves; why one individuals indifference curves can never cross".

Theory of Choice Assumption of Completeness Assumption of Transitivity More is Better than Less –If Basket A contains more than Basket B, then A is preferred to B

Assigned Lectures Elasticity The Theory of Choice More on the Theory of Choice More Applications of Indifference Curves

Elasticity

The Theory of Choice

More on the Theory of Choice

More Applications of Indifference Curves

Lectures for Next Week The Economics of Bads The Value of Time Consumer Surplus Applying Consumer Surplus Consumer Surplus and Deadweight Loss More on Consumer Surplus

The Economics of Bads

The Value of Time

Consumer Surplus

Applying Consumer Surplus

Consumer Surplus and Deadweight Loss

More on Consumer Surplus