Question

Q1-A/ Suppose that 200,000 Uber trips are taken every day in New York City and suppose that the elasticity of demand for an Uber trip is –0.5. If the price increased by 10% how many Uber trips would be taken in a day? Q1-B/ Suppose Haya has $120 of income left each week after she pays her bills and puts some money away in a savings account, and she has two ways to spend this extra money: go to the movies, which costs $18 with popcorn and soda, or go out to a club, which costs $33 including the cover charge and drinks.

Assuming these are her only two choices to spend the extra money, what can you say about the following bundles of going to the movies and clubbing? Which of these could possibly be the utility-maximizing bundle? a. 3 movies and 2 nights out at the club b. 2 movies and 3 nights out at the club c. 2 movies and 2 nights out at the club

Answer 1

Q1)

A)

Price elasticity of demand measures degree of responsiveness of the quantity demanded of a commodity to a change in price. It is calculated as-

Price elasticity of demand= percentage change in quantity demanded/ percentage change in price

Given - percentage increase in price= 10% and price elasticity of demand= -0.5

Substituting values-

-0.5= percentage change in quantity demanded/ 10%

Cross multiplying-

Percentage change in quantity demanded= -0.5 x 10%

Percentage change in quantity demanded= -5%

Percentage change in quantity demanded= -5% ( negative sign indicates that quantity demanded of Uber trips will decrease by 5%)

Change in quantity demanded= percentage change in quantity demanded x initial quantity demanded

Change in quantity demanded= 5% x 200,000

Change in quantity demanded= 5/100 x 200,000

Change in quantity demanded= 0.05 x 200,000

Change in quantity demanded= 10,000

Hence, the quantity demanded of Uber trips will decrease by 10,000.

New quantity demanded of Uber trips= Initial Quantity- change in quantity

New quantity= 200,000 - 10,000

New quantity demanded of Uber trips= 190,000.

Hence, the number of Uber trips taken in a day after increase in price by 10% will be 190,000 Uber trips. ( Answer).

Q1)

B) answer-option a. 3 movies and 2 night out at club.

Utility maximising bundle is the bundle which shows consumption of goods in such a way that utility is maximized and the consumer is also able to spend his entire budget on purchase of various commodities. Here, Haya's utility will be maximized when she spends her entire $120 on purchase of movies and night our at clubs.

Let's observe each bundle-

Given price of movies is $18 and price of night out at club is $33.

a) 3 movies and 2 night out at club.

Expenditure incurred on movies= 3 x $18= $54

Expenditure incurred on night out at club= 2 x $33= $66

Total expenditure incurred= $54 + $66= $120.

b) 2 movies and 3 night out at club

Expenditure incurred on movies= 2 x $18= $36

Expenditure incurred on night out at club= 3 x $33= $99

Total expenditure incurred= $36+$99= $135

c) 2 movies and 2 night out at club

Expenditure incurred on movies= 2 x $18= $36

Expenditure incurred on night out at club= 2 x $33 = $66

Total expenditure incurred= $36+$66=$102

Hence we can see that when Haya will consume bundle b, she will have to incur an expenditure of $135 which is out of her reach as her budget is only $120. When Haya will consume bundle c, she will be able to spend only $102 , hence her utility would not be maximized. When she will consume bundle a, she will be able to spend her entire budget of $120 on purchase of movies and night out at club and her utility will be maximized.

Hence, utility maximising bundle is - option a. 3 movies and 2 night out at club.