Question 4

Increase in price from $ 75 to $ 95 reduces to a rise in the quantity from 130000 to 175000.

Therefore the demand obeys the law of demand thus, the data represents a supply curve.

Price elasticity= Percentage change in quantity*price/ percent change in price*quantity

Price elasticity=25%*75/47%*130000

Price elasticity=4.5*06

The price elasticity is for the supply of goods because it is positive value.

Since the value of price elasticity indicate that the good is almost inelastic.

Income elasticity of Demand

Income elasticity= (% change in demand/ initial demand)/ (% change in income/ initial income)

Income elasticity= (-37%*1500)/ (45%/100000) =-54.2

The income elasticity of the good is less than zero. It means that the demand of good decreases

as income rises thus, the good is inferior.

Cross-price elasticity of demand

Cross-price elasticity of demand= change in the quantity of good A/change in the price of good

B* Sum of the price of good A/Sum of the quantity of good B

Cross-price elasticity of demand=30/-15*(85+70)/ (40+70)

Cross-price elasticity of demand=-2.82

The two good are complementary because the cross elasticity is negative. As the price of good A

increases the demand for B reduces because it is required for it consumptions.

Question 5

Market for firewood

F
P1 p2

E
Price

e
e
E
D

q2 q1

Quantity

Since the demand elasticity of demand is greater than one then the demand of the good is elastic

while the supply is less than one then supply is inelastic. It means that increase in the tax will

lead to a rise in the price of the good. It will cause the demand of the good that will shift the

supply curve upwards. The deadweight loss due to the tax is represented by triangle EFC.

The consumer bears more of the tax incident because their price elasticity is elastic. Thus the

supplier are able to transfer the tax responsibility to them. While the supplier have an inelastic

price elasticity thus are not affect by the changes.

Tax revenue= tax per unit* unit sold

Tax per unit= $5

Unit sold=23000

Tax revenue=$5*23000

Tax revenue=$115000

Question 5

Crepes

Quantity of Crepes Total Utility Marginal Utility Marginal Utility per $

0 0 0 0

1 14 14-0=14 14/5=1.8

2 22 22-14=8 8/5=1.6

3 28 28-22=6 6/5=1.2

4 34 34-28=6 6/5=1.2

5 39 39-34=5 5/5=1

6 43 43-39=4 4/5=0.8

7 46 46-43=3 3/5=0.6

8 48 48-46=2 2/5=0.4

9 49 49-48=1 1/5=0.2

10 50 50-49=1 1/5=0.2
Film Tix

Quantity of Film Tix Total Utility Marginal Utility Marginal Utility per $

0 0 0 0/10=0

1 24 24-0=24 24/10=2.4

2 32 32-24=8 8/10=0.8

3 38 38-32=6 6/10=0.6

4 42 42-38=4 4/10=0.4

5 44 44-42=2 2/10=0.2

Budget line
5
4
3
2
Crepes

1 2 3 4 5 6 7 8 9 10

Movies

The optimal combination of the two goods is six unit of Creepes and two units of Movies. It is
because at this combination marginal utility per dollar for the two goods is the same.
The marginal utility curve is downward sloping due to the law of diminishing return at the
number of units increases the utility reduces