PRINCIPLES OF MICROECONOMICS ASSIGNMENT
Question One: The following table gives a total utility schedule for Michael who consumes sodas. The price of each can of soda is $50.
a) Copy and complete the table.
|
Number of cans
|
Total Utility
|
Marginal Utility
|
MU/P
|
Consumer Surplus
|
|
0
|
0
|
0
|
0
|
0
|
|
1
|
200
|
200
|
4
|
150
|
|
2
|
350
|
150
|
3
|
100
|
|
3
|
440
|
90
|
1.8
|
40
|
|
4
|
490
|
50
|
1
|
0
|
|
5
|
500
|
10
|
0.2
|
(40)
|
|
6
|
500
|
0
|
0
|
(50)
|
|
7
|
490
|
(10)
|
(0.2)
|
(60)
|
C. Explain the "Law of Diminishing Marginal Utility".
a) How does the total utility behave under the following conditions:
i. If marginal utility is zero.
ii. If marginal is negative.
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, calculates 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.
B. Explain the answers you arrived at in part A:
Persons who earn $20,000 per week:
i. A change in price from $400-$500 results in 1. This result can be seen as Unit Elastic. Hence, percentage change in price is equal to percentage change in quantity demanded.
ii. A change in price from $500-$600 result in 2.22. This result can be seen as Elastic. Therefore, percentage change in price is less than percentage change in quantity demanded.
iii. A change in price from $600-$700 results in 6.09. This results can be seen as Elastic. Hence, percentage change in price is less than percentage change in quantity demanded.
Persons who earn $30,000 per week:
i. A change in price from $400-$500 results in 0.77. This result can be seen as Inelastic. Therefore, percentage change in price is greater than percentage change in quantity demanded.
ii. A change in price from $500-$600 result in 0.83. This result can be seen as Inelastic. Hence, percentage change in price is greater than percentage change in quantity demanded.
iii. A change in price from $600-$700 results in 1.64. This results can be seen as Elastic.Therefore, percentage change in price is less than percentage change in quantity demanded.
C. List four (4) factors that influence the Price Elasticity of Demand for any product
i. Type of Product
ii. Substitute (Availability of Substitute)
iii. Percentage income spent on the product.
iv. Time Factor
D. Distinguish between Normal Goods and Inferior Goods.