05 Jun Question Problem 1 Assume that the price of sm
Question
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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