Question

6-8, please show work, thanks!

1. Extending the exercise in class, the consumers have $300 to spend. Now the price is $100 for jeans. Jeans 100 Sweater $ 25 Marginal Marginal Utility per Utility (A Dollar Spent = (A) / $25 Quantity Quantity Marginal Utility (B Marginal Utility per Dollar Spent = (B) / $100 14=100/25 VOO AWNO 80 SI 160 2.6=160/100 150 1.5 100 1.0 08 0.3 10 0.1 3 0.03 20.02 1. Calculate the marginal utility per dollar spent for jeans with the new price (divide the marginal utility in column B by the price of 100) (2 pts) 2. How many units of sweaters and jeans will the consumer buy now? (2 pts) 8(25)+1(100) = $300 The consomer will buy 8 unito of Sweaters and 1 unit of seans. 3. We found that when price for jeans is $50, quantity demanded is 3; when price is $75, quantity is demanded is 2. Now we have quantity demanded when price=100 from question 2 Draw these three points on a graph and connect the points to get the demand curve. (2 pts) Demand Corve for Tears $125 $125 - 150 $75 1 2 3 4 5 Quantity

Answer 1

6. We have to calculate the price elasticity of demand when the price changes from $ 75 to $ 100.

In question 3 it is mentioned that when price is $ 75 quantity is 2 units and when price is $ 100 quantity is 1 units.

We can determine the elasticity of demand using the mid point method using the following formula

%ΔΩ e = ΔΡ

Q2-01 e = P.-P. P+P1

Be= (Q2 - Q1)(P2 + Pi) (Q2 +Q1) (P2 - P).

Plug in the given values in the above equation we get

(1-2)(100 +75) (1+2)(100-75)

Be= -1 x 175 3 x 25

e= -2.33

Elasticity of demand = -2.33 (Elastic)

7. When Price, P1 = $ 75

Quantity of sweaters, Q1 = 6 units

When Price, P2 = $ 100, Quantity of jeans = 1

Demand for sweaters, Q2 = (300 - 100*1)/25 = 200 / 25 = 8 units

Cross elasticity of demand can be determined using the following formula

%AQs er = APJ

(Qs, – Qs)(P12 + P3) (Qs +Qs)(P), – Pj.)

Plug in the given values in the above equation we get

Sex = (8 – 6)(100 + 75) (8+6) (100 – 75)

Bez = (2)(175) (14)(25)

Be=1

Cross elasticity = 1

8. Since, the cross elasticity of demand is a positive number therefore, jeans and sweater are Substitute to each other.

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