Estimate imply about the price elasticity of demand

Estimate imply about the price elasticity of demand Microeconomics

1. The accompanying table shows the price and yearly quantity sold of ice cream cones on Sidfield Island.

Price of Ice Cream Cones

Quantity of Ice Cream Cones Demanded

$1

3000

$2

2400

$3

1600

$4

800

  1. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $1 to $2. What does this estimate imply about the price elasticity of demand for ice cream cones?
  2. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. What does this estimate imply about the price elasticity of demand for ice cream cones?
  3. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?

2. Newspaper vending machines are designed so that once you have paid for one paper; you have access to all the papers in the machine and could take multiple papers at a time. However, other vending machines dispense only one item (the item you bought). You do not have access to all the goods (sodas, candy, snacks, etc.) at one time. Using the concept of marginal utility, explain why these vending machines differ?

3. Amy is shopping at a dollar store. She is currently buying 5 bracelets that cost $1 each and 4 sodas that cost $1 each. The table below indicates the marginal utility she obtains when she purchases this combination.

 

Quantity

Price per Unit

MU per unit

Bracelets

5

$1

30

Sodas

4

$1

40

a. A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is this consumer maximizing her utility?

b. If not, should she consume more bracelets or more sodas? Explain.

Answer the following assuming that one more bracelet is purchased and one less soda is consumed:

c. Recall the law of diminishing marginal utility. What happens to the Marginal Utility of bracelets and the Marginal Utility of soda?

d. What happens to the Total Utility received?

e. What happens to the total dollars spent?

4. On Tuesday nights, a local restaurant has a kid’s meal special. Nina’s son, Braden likes the restaurant’s chicken nuggets, but Braden seems to be growing bigger every day and the kid’s meal is usually not enough. The restaurant does allow for additional purchase of chicken nugget servings. Nina’s willingness to pay for each serving is shown in the table below.

Number of Chicken Nugget servings

(servings)

Willingness to pay for chicken nuggets

(per serving)

1

$5

2

$4

3

$3

4

$2

5

$1

6

$0

a. If the price of an additional serving of chicken nuggets is $3, how many servings will Nina buy for Braden? How much consumer surplus does he receive?

b. The following week, Nina and Braden are back at the restaurant again, but now the price of a serving of chicken nuggets is $4. By how much does his consumer surplus decrease compared to the previous week?

c. One week later, they return to the restaurant again. Nina discovers that the restaurant is offering an “all-you-can-eat” special for $12. How many chicken nugget servings will Braden eat, and how much consumer surplus does he receive now?

d. Suppose you own the restaurant and Braden is a “typical” customer. What is the highest price you can charge for the “all-you-can-eat” special and still attract customers?

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