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Demand and Supply
Problem 1
Assume that the price of smartphones increased from $420 to $444 per unit. The manufacturer decides to supply 15,000 units instead of 12,000.
- Calculate the price elasticity of supply.
- Is supply elastic or inelastic?
- Describe at least one factor that determines Price elasticity of supply (note, this is different than PE of Demand).
Hint: To answer this question we need to use the midpoint formula. Assume we have the two ordered pairs (Q1,P1) and (Q2,P2).
Problem 2
Compare and contrast a public good versus a private good. What are the principal characteristics of each? What are the two key characteristics of public goods? Is there a free rider problem when it comes to public goods? Why? Do you consider your local police force a public good or a private good? How come? How about your local TV service? Please explain your answer.
Problem 3
Use the following to answer the questions below:
z is the marginal utility per dollar, x is the amount spent on product A, and y is the amount spent on product B.
Assume MUA = z = 10 – x and MUB = z = 21 – 2y.
Assume that the consumer has $10 to spend on A and B; that is, x + y = 10.
(a) What is best way to allocate the expenditure of the $10?
(b) What is the marginal utility per dollar in the optimal allocation?
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