Scribd
Upload
9 views

Assignment Answer Sheet

The document contains examples of calculating price elasticity of demand, equilibrium price and quantity, utility maximization, and marginal rate of substitution. It provides the definitions and steps to solve for each concept. Examples include finding the price elasticity of demand for movie tickets, calculating equilibrium using supply and demand equations, and maximizing utility subject to a budget constraint.

Uploaded by

seyoum shimels
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
9 views

Assignment Answer Sheet

The document contains examples of calculating price elasticity of demand, equilibrium price and quantity, utility maximization, and marginal rate of substitution. It provides the definitions and steps to solve for each concept. Examples include finding the price elasticity of demand for movie tickets, calculating equilibrium using supply and demand equations, and maximizing utility subject to a budget constraint.

Uploaded by

seyoum shimels
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 7

Answer Sheet

1.To calculate the price elasticity of demand, we need to use the formula:
E = (dQ/dP) * (P/Q)
Where:
E = Price elasticity of demand
dQ/dP = Derivative of the demand function with respect to price (rate of
change of quantity with respect to price)
P = Price of tickets
Q = Quantity demanded
First, let's find the derivative of the demand function, dQ/dP:
d(p) = 200000 - 10000p
To find the derivative, we differentiate the function with respect to p:
dQ/dP = -10000
Next, we need to calculate the quantity demanded (Q) at the given price (P =
12 birr):
d(P) = 200000 - 10000 * 12
= 200000 - 120000
= 80000
Now, we can substitute the values into the price elasticity of demand formula:
E = (dQ/dP) * (P/Q)
= (-10000) * (12/80000)
= -0.15
The price elasticity of demand for tickets to the Ethiopian camparada film is -
0.15. Since the value is negative, we can conclude that the demand is price
inelastic, meaning that a change in price will result in a proportionately smaller
change in quantity demanded.

2.To find the price elasticity of demand at the equilibrium point, we first need to
determine the equilibrium price and quantity by setting the quantity demanded (Qd)
equal to the quantity supplied (Qs) and solving for the price.
Given:
Qd = 80 - 2p
Qs = -20 + 8p
Equating Qd and Qs:
80 - 2p = -20 + 8p
Rearranging the equation:
10p = 100
p = 10
Substituting the equilibrium price (p = 10) back into either the demand or supply
equation, we can find the equilibrium quantity. Let's use the demand equation:
Qd = 80 - 2p
Qd = 80 - 2(10)
Qd = 80 - 20
Qd = 60
So, at the equilibrium point, the price (p) is 10 and the quantity demanded (Qd) is 60.
Now, let's calculate the price elasticity of demand at the equilibrium point using the
formula:
E = (dQ/dP) * (P/Q)
To find dQ/dP, we differentiate the demand function with respect to price (p):
dQ/dP = -2
Substituting the values into the price elasticity formula:
E = (dQ/dP) * (P/Q)
= (-2) * (10/60)
= -1/3
Therefore, the price elasticity of demand at the equilibrium point is -1/3.

3. a) To find the market clearing price and quantity, we need to set the quantity
demanded (Qd) equal to the quantity supplied (Qs) and solve for the price.
Given:
Qd = 30 - 2p
Qs = -6 + p
Equating Qd and Qs:
30 - 2p = -6 + p
Combining like terms:
3p = 36
p = 12
Substituting the equilibrium price (p = 12) back into either the demand or supply
equation, we can find the equilibrium quantity. Let's use the demand equation:
Qd = 30 - 2p
Qd = 30 - 2(12)
Qd = 30 - 24
Qd = 6
Therefore, at the market clearing price of 12, the quantity demanded (Qd) and the
quantity supplied (Qs) are both 6.
b) To calculate the price elasticity of demand and the supply elasticity, we need to use
the respective formulas:
Price elasticity of demand (E) = (dQd/dp) * (p/Qd)
Supply elasticity (Es) = (dQs/dp) * (p/Qs)
Let's calculate each elasticity:
For the price elasticity of demand (E):
dQd/dp = -2 (derivative of Qd with respect to p)
p = 12 (equilibrium price)
Qd = 6 (equilibrium quantity)
E = (-2) * (12/6)
E = -4
The price elasticity of demand is -4.
For the supply elasticity (Es):
dQs/dp = 1 (derivative of Qs with respect to p)
p = 12 (equilibrium price)
Qs = 6 (equilibrium quantity)
Es = (1) * (12/6)
Es = 2
The supply elasticity is 2.

4. a) To find the market equilibrium price and quantity, we need to set


the quantity demanded (Qd) equal to the quantity supplied (Qs) and
solve for the price.
Given:
Qd = 50 - P
Qs = P - 5
Equating Qd and Qs:
50 - P = P - 5
Combining like terms:
2P = 55
P = 27.5
Substituting the equilibrium price (P = 27.5) back into either the
demand or supply equation, we can find the equilibrium quantity.
Let's use the demand equation:
Qd = 50 - P
Qd = 50 - 27.5
Qd = 22.5
Therefore, at the market equilibrium, the price is 27.5 Birr per unit
and the quantity demanded and supplied are both 22.5 units.
b) If the market price is fixed at Birr 25 per unit, we need to
determine whether this price is above or below the equilibrium price.
Given:
Fixed price = 25 Birr per unit
Since the equilibrium price is 27.5 Birr per unit, the fixed price of 25
Birr per unit is below the equilibrium price. In this case, the quantity
demanded (Qd) would be higher than the quantity supplied (Qs),
resulting in excess demand or a shortage in the market.
c) To calculate the price elasticity of demand at the equilibrium point,
we can use the formula:
Price elasticity of demand (E) = (dQd/dP) * (P/Qd)
To find dQd/dP, we differentiate the demand function with respect to
price (P):
dQd/dP = -1 (derivative of Qd with respect to P)
Substituting the values into the price elasticity formula:
E = (dQd/dP) * (P/Qd)
= (-1) * (27.5/22.5)
= -1.222
The price elasticity of demand at the equilibrium point is
approximately -1.222. Since the value is negative, it indicates that the
demand is price elastic, meaning that a change in price will result in a
proportionately larger change in quantity demanded.

5.Given:
Utility function: U = X^2 * Y^2
Price of X: P_X = 1 Birr
Price of Y: P_Y = 4 Birr
Budget: M = 10 Birr
To maximize utility, we need to allocate the budget between X and Y in a way
that maximizes U = X^2 * Y^2, subject to the budget constraint.
Let's denote the quantity of X as Q_X and the quantity of Y as Q_Y.
The budget constraint can be expressed as:
P_X * Q_X + P_Y * Q_Y = M
1 * Q_X + 4 * Q_Y = 10
Q_X + 4Q_Y = 10
To solve this problem, we can use the method of substitution:
From the budget constraint, we have Q_X = 10 - 4Q_Y.
Substituting Q_X into the utility function, we have:
U = (10 - 4Q_Y)^2 * Q_Y^2
Expanding and simplifying:
U = (100 - 80Q_Y + 16Q_Y^2) * Q_Y^2
U = 16Q_Y^4 - 80Q_Y^3 + 100Q_Y^2
To find the maximum, we take the derivative of U with respect to Q_Y and set
it equal to zero:
dU/dQ_Y = 64Q_Y^3 - 240Q_Y^2 + 200Q_Y = 0
Dividing through by 8Q_Y:
8Q_Y^2 - 30Q_Y + 25 = 0
We can solve this quadratic equation for Q_Y using the quadratic formula:
Q_Y = (-(-30) ± √((-30)^2 - 4 * 8 * 25)) / (2 * 8)
Q_Y = (30 ± √(900 - 800)) / 16
Q_Y = (30 ± √100) / 16
Q_Y = (30 ± 10) / 16
We have two potential solutions for Q_Y:
Q_Y = (30 + 10) / 16 = 40/16 = 2.5
Q_Y = (30 - 10) / 16 = 20/16 = 1.25
Since the quantity of Y cannot be negative, we discard the solution Q_Y =
1.25.
Therefore, the quantity of X that maximizes utility is Q_X = 10 - 4Q_Y = 10 -
4(2.5) = 10 - 10 = 0.
The quantities that maximize utility are Q_X = 0 and Q_Y = 2.5.
b) To find the total utility at the optimum point, substitute the values of Q_X
and Q_Y into the utility function:
U = X^2 * Y^2
U = 0^2 * 2.5^2
U = 0 * 6.25
U=0
The total utility at the optimum point is 0.
c) The marginal rate of substitution (MRS) is the rate at which a consumer is
willing to substitute one good for another while maintaining the same level of
utility.
The MRS can be calculated as the ratio of the marginal utilities of the two
goods:
MRSxy = ∂U/∂X / ∂U/∂Y
Taking the partial derivatives of the utility function:
∂U/∂X = 2X * Y^2
∂U/∂Y = 2Y * X^2
Substituting the values of X and Y at the optimum point (Q_X = 0, Q_Y =
2.5):
∂U/∂X = 2(0) * (2.5)^2 = 0
∂U/∂Y = 2(2.5) * (0)^2 = 0
Since both partial derivatives are zero, the MRSxy is indeterminate at the
optimum point.

You might also like