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EC10C Problem Set 3

1. Define the following:

a. Price Elasticity of Demand
b. Income Elasticity of Demand
c. Cross-Price Elasticity of Demand

2. If the price of cheese falls from $100 per kilo to $80, and the quantity demanded
increases from 35 kilos to 55 kilos, then:
a. Calculate the price elasticity of demand using the point elasticity method.
b. Calculate the price elasticity of demand using the mid- point method.
c. Interpret what the two price elasticities mean in parts (a) and (b).

3. Sanya’s income decreases from $50,000 to $35, 000 per month. She then changes the
amount that she purchases of liver for the period from 10 packs to 15 packs.
a. Calculate Sanya’s income elasticity of demand.
b. What type of good is liver?

4. The price for a jar of orange marmalade sells for $120, while the number of jars of guava
jelly bought is 5. The price of marmalade increases to $140, while the number of jars of
guava jelly purchased increases to 12 bottles.
a. Calculate the cross-price elasticity using the point elasticity method.
b. Calculate the cross- price elasticity using the midpoint method.
c. What type of good is orange marmalade?

5. Joan buys three pairs of jeans pants when her allowance for clothing is $10, 000 per
week. She purchases five pairs when her income is $11,500 per month.
a. Using the mid point method, find Joan’s income elasticity of demand for jeans.
b. What type of good is a pair of jeans for Joan?
c. Interpret the value of the income elasticity of demand.
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6. Define the following:

a. Utility
b. Total Utility
c. Marginal Utility

7. What is the difference between the Cardinal Utility Theory and the Ordinal Utility
Theory?

8. Shawnee gets $250 per day for lunch. She spends her lunch money on beef patty and
soda. The price for a beef patty is $50 and a small cup of soda costs $25 each. Consider
the beef patty as good X and the soda as good Y.
a. Calculate the horizontal and vertical intercepts for Shawnee’s budget line.
b. Draw the budget line showing these intercepts.
c. What is the slope of this budget line?

9. Show the effect that each of the following conditions will have on the budget line:
a. An increase in the price of good X
b. A fall in the price of good Y
c. A fall in income
d. A decrease in the prices of goods X and Y in the same amount

10. What are the properties of indifference curves?

11. What is the condition for Consumer Equilibrium?

12. Draw the graph of Consumer Equilibrium, indicating the optimal quantities which will be
consumed for both goods X and Y.

13. What is the Income Consumption Curve? Give a graphical representation of this curve.
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14. What is the Price Consumption Curve? Give a graphical representation of this curve.

15. Derive the demand curve for good X from the graph of the price consumption curve.