Question

1. The ultimate purpose of indifference curve analysis is to illustrate that:

2. The price of a bus ride decrease, but the total revenue of the bus company does not change. This means the demand for the bus rides must be approximately

3. If, when the price of a product rises from $1.50 to $2, the quantity demanded of the product decreases from 1,000 to 900, the price elasticity of demand coefficient, using the midpoint formula, is

Answer 1

1) Purpose of indifference curve is to show the combinations of two goods the consumer is willing to consume with varying quantities but deriving the same utility from them .

For example if person A is consuming ice cream and pizza, his indifference curve would show all the combinations of ice cream and pizza he can consume which would give him the sMe utility, ie he would be indifferent between them.

2)Total revenue remains same in case when the change in price is exactly equal to change in quantity demanded. This happens in case is unit elasticity ie the%change in price=% change in quantity. When the price of bus ride reduces the demand for it must have increased by the same amount.

3) Midpoint method of elasticity

Ed =[(Q2-Q1)/(Q1+Q2)/2]/[(P2-P1)/(P2+P1)/2]

Putting the values in the formula we get

Ed= [(900-1000)/(1900/2]/[0.5/3.5/2]

Ed=(-100/950)/(0.285)

Ed = -100/270.75 =(-) 0.369 or (-)0.37

(You can comment for doubts)