Question One:
Assume Susan has $80 to spend on candies and chips each week and both goods must be purchased whole units (no fraction). The price of candies is $8 each and chips is $20.
CANDIES CHIPS
# of cans Total Utility (TU) Marginal Utility (MU)
MU/P
Consumer Surplus # of cans Total Utility (TU) Marginal Utility (MU)
MU/P
Consumer Surplus
1 50 1 22
2 30 2 20
3 100 3 10
4 10 4 5
5 116 5 60
6 5 6 2
7 2 7 63
a) Copy and complete the tables. (6 marks)
b) Are these figures consistent with the law of diminishing marginal utility? Given the budget of $80,what quantity of candies and chips will maximize Susan’s level of satisfaction? (2 marks)
c) Draw the graphs of total and marginal utility on the same graph. (4 marks)
d) Explain the “Law of Diminishing Marginal Utility”. (3 marks)
Question Two
The table below shows the price and quantities demanded of restaurant meals by two groups of professionals during restaurant week. One group earns $20,000 per week and the other earns $30,000 per week:
Price of Restaurant Meals
Professionals who earn $20,000 per week Professionals who earn $30,000 per week
$400 30 50
$500 24 42
$600 16 36
$700 8 30
A. Using the midpoint method, calculate the price elasticity of demand for both groups when the price of a restaurant meals increase from $400 to $500, $500 to $600 and $600 to $700. (6 marks)
B. Explain the answers for different types of elasticities you arrived at in part A: (3 marks)
C. List four (4) factors that influence the Price Elasticity of Demand for any product
(4 marks):
D. Distinguish between Normal Goods and Inferior Goods (2
Question One:
a) To complete the tables, we need to calculate the Marginal Utility per Price (MU/P) and the Consumer Surplus for each quantity of candies and chips purchased.
For the Candies table:
# of cans | Total Utility (TU) | Marginal Utility (MU) | MU/P | Consumer Surplus
1 | 50 | 22 | 2.75 | $13.75
2 | 30 | 20 | 2.50 | $15.00
3 | 100 | 10 | 1.25 | $6.25
4 | 10 | 5 | 0.63 | $3.13
5 | 116 | 60 | 7.50 | $37.50
6 | 5 | 2 | 0.25 | $1.25
7 | 2 | 63 | 7.88 | $39.38
For the Chips table:
# of cans | Total Utility (TU) | Marginal Utility (MU) | MU/P | Consumer Surplus
1 | 30 | 20 | 1.00 | $20.00
2 | 20 | 10 | 0.50 | $10.00
3 | 10 | 5 | 0.25 | $5.00
4 | 5 | 2 | 0.10 | $2.00
5 | 60 | 60 | 3.00 | $30.00
6 | 2 | 2 | 0.10 | $2.00
7 | 63 | 63 | 3.15 | $31.50
b) The figures are consistent with the law of diminishing marginal utility. This law states that as an individual consumes more of a specific good, the marginal utility they derive from each additional unit of that good decreases. In the tables, we can see that as the quantity of candies or chips consumed increases, the marginal utility per unit decreases.
To maximize Susan's level of satisfaction with a budget of $80, we need to find the combination of candies and chips that gives her the highest total utility. Looking at the Consumer Surplus column in both tables, we can see that the highest combined Consumer Surplus occurs when Susan buys 5 cans of candies and 1 can of chips. This combination yields a total consumer surplus of $37.50 for candies and $30.00 for chips, totaling $67.50 of consumer surplus.
c) To draw the graphs of total and marginal utility on the same graph, we will have total utility on the y-axis and quantity of candies/chips on the x-axis. The marginal utility can be represented by a line connecting the points on the graph.
d) The "Law of Diminishing Marginal Utility" states that as an individual consumes more of a specific good, the additional satisfaction derived from each additional unit of that good decreases. Essentially, it means that the more of something you consume, the less satisfaction you get from each additional unit. This law is based on the concept of diminishing marginal utility, which implies that the first unit of a good consumed gives the highest level of satisfaction, and each subsequent unit gives less additional satisfaction.
Question Two:
A. To calculate the price elasticity of demand using the midpoint method, we need to use the formula:
Price elasticity of demand = [(Q₂ - Q₁)/((Q₂ + Q₁)/2)] / [(P₂ - P₁)/((P₂ + P₁)/2)]
Using the given data:
For professionals earning $20,000 per week:
Price elasticity from $400 to $500 = [(24 - 30)/((24 + 30)/2)] / [(500 - 400)/((500 + 400)/2)] = -1.067
Price elasticity from $500 to $600 = [(16 - 24)/((16 + 24)/2)] / [(600 - 500)/((600 + 500)/2)] = -1.067
Price elasticity from $600 to $700 = [(8 - 16)/((8 + 16)/2)] / [(700 - 600)/((700 + 600)/2)] = -1.067
For professionals earning $30,000 per week:
Price elasticity from $400 to $500 = [(42 - 50)/((42 + 50)/2)] / [(500 - 400)/((500 + 400)/2)] = -1.067
Price elasticity from $500 to $600 = [(36 - 42)/((36 + 42)/2)] / [(600 - 500)/((600 + 500)/2)] = -1.067
Price elasticity from $600 to $700 = [(30 - 36)/((30 + 36)/2)] / [(700 - 600)/((700 + 600)/2)] = -1.067
B. The price elasticities of demand calculated in part A are all equal to -1.067. This value indicates that the demand for restaurant meals by both groups of professionals is relatively price inelastic, meaning that a 1% increase in price would lead to approximately a 1.067% decrease in quantity demanded.
C. Four factors that influence the Price Elasticity of Demand for any product are:
1. Availability of substitutes: The more substitutes available for a product, the more elastic its demand is likely to be. If there are many similar alternatives, consumers can easily switch from one product to another when the price changes.
2. Necessity vs. luxury: Necessities tend to have more inelastic demand because consumers prioritize these purchases regardless of price changes. Luxury goods, on the other hand, are more elastic as consumers can reduce or eliminate their demand for these goods when their prices increase.
3. Time: Over the long term, demand tends to become more elastic as consumers have more time to adjust their consumption patterns and find suitable alternatives. In the short term, demand may be less elastic due to immediate needs or limited options.
4. Income level: Higher-income consumers tend to have more elastic demand as they have more purchasing power and can easily switch between different products or brands based on price changes. Lower-income consumers, who have less disposable income, may have more inelastic demand for essential goods.
D. Normal goods are goods for which demand increases as income increases. As consumers' incomes rise, they are willing to buy more of these goods. Examples include restaurant meals, luxury goods, and vacations.
Inferior goods are goods for which demand decreases as income increases. These are usually lower-quality or lower-priced substitutes for other goods. As consumers' incomes rise, they can afford better alternatives and tend to stop purchasing inferior goods. Examples include generic or store-brand products, low-quality clothing, or public transportation for those who can afford a car.