Question

10. A college raises its annual tuition from $23,000 to $24,000, and its student enrollment falls from 4,877 to 4,705. Compute the price elasticity of demand. (Would demand be elastic or inelastic?) a. 1.25 b. .84 c. .56 d. 2.34 11. As the price of good X rises from $10 to $12, the quantity demanded of good Y rises from 100 units to 114 units. Are X and Y substitutes or complements? What is the cross elasticity of demand? a. .72 which would make them substitutes b. 1.34 which would make them substitutes c. -.96 which would make them complements d. -.34 which would make them substitutes

12. The quantity demanded of good X rises from 130 to 145 units as income rises from $2,000 to $2,500 a month. What is the income elasticity of demand? a. 1.56 b. .34 c. 1.10 d. .491

13. The quantity supplied of a good rises from 120 to 140 as price rises from $4 to $5.50. What is price elasticity of supply? a. 1.21 b. .487 c. .678 d. 5.45

14. On average, total utility rises as marginal utility declines. T/F T F

15. The law of diminishing marginal utility is consistent with the fact that people trade. Do you agree or disagree. Be able to explain your answer. a. Yes, I agree because people are prone to trade something of lesser value to them for something that has greater value to them. b. No, I disagree because people are prone to trade something of greater value to them for something that has lesser value to them.

16. Assume the marginal utility of good A is 4 utils, and its price is $2, and the marginal utility of good B is 6 utils, and its price is $1. Is the individual consumer maximizing (total) utility if she spends a total of $3 buying one unit of each good? (Be able to explain your answer). a. Yes b. No

Answer 1

Question 10

College raises its annual tuition from $23,000 to $24,000.

% change in annual tuition = [(24000 - 23000)/23000] * 100 = 4.35%

Student enrollment falls from 4877 to 4705.

% change in student enrollment = [(4705 - 4877)/4877] * 100 = -3.53%

Calculate the elasticity of demand -

Elasticity of demand = % change in student enrollment/% change in annual tuition

Elasticity of demand = -3.53/4.35 = 0.811

So, elasticity of demand is approximately near to 0.84.

The value of price elasticity of demand is less than 1.

So, demand would be inelastic.

Hence, the correct answer is the option (b) [0.84].

Question 11

The price of Good X increases from $10 to $12.

% change in price of Good X = [(12 - 10)/10] * 100 = 20%

The quantity demanded of Good Y rises from 100 units to 114 units.

% change in quantity demanded of Good Y = [(114 - 100)/100] * 100 = 14%

Calculate the cross elasticity of demand -

Cross elasticity of demand = % change in quantity demanded of Good Y/% change in price of Good X

Cross elasticity of demand = 14/20 = 0.7

The value of cross price elasticity of demand is positive.

So, X and Y are substitutes.

Hence, the correct answer is the option (a) [0.72 which would make them substitutes].