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Economics

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Jan 9, 2024

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Chapter 6 1. To calculate the price elasticity of demand, we need the initial price, the final price, the initial quantity demanded, and the final quantity demanded. Given information: Initial price (P1) = $400.00 Final price (P2) = 75% of $400.00 = $300.00 Initial quantity demanded (Q1) = 200 bags Final quantity demanded (Q2) = 550 bags Now we can calculate the price elasticity of demand using the formula: Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price) Percentage Change in Quantity Demanded = ((Q2 - Q1) / Q1) * 100% Percentage Change in Price = ((P2 - P1) / P1) * 100% Let's calculate the percentage changes first: Percentage Change in Quantity Demanded = ((550 - 200) / 200) * 100% = 175% Percentage Change in Price = ((300 - 400) / 400) * 100% = -25% Now we can calculate the price elasticity of demand: Price Elasticity of Demand = (175% / -25%) = -7 The price elasticity of demand for the handbags in this scenario is -7. This indicates that the demand for these handbags is highly price elastic, meaning that a 1% decrease in price would result in a 7% increase in quantity demanded, and vice versa. a. To calculate the price elasticity of demand using the formula that is provided: Change in quantity demanded = Q2 - Q1 Average quantity = (Q2 + Q1) / 2 Change in price = P2 - P1 Average price = (P2 + P1) / 2 Given information: Q1 = 200 bags Q2 = 550 bags P1 = $400.00 P2 = $300.00 Let's calculate the values:

Change in quantity demanded = 550 - 200 = 350 bags Average quantity = (550 + 200) / 2 = 375 bags Change in price = $300.00 - $400.00 = -$100.00 (negative because the price decreased) Average price = ($300.00 + $400.00) / 2 = $350.00 Now we can calculate the price elasticity of demand: Elasticity = (Change in quantity demanded / Average quantity) / (Change in price / Average price) = (350 bags / 375 bags) / (-$100.00 / $350.00) = (0.9333) / (-0.2857) ≈ -3.26 The price elasticity of demand in this scenario is approximately -3.26. This indicates that the demand for these handbags is price elastic, meaning that a 1% decrease in price would result in a more than 3.26% increase in quantity demanded, and vice versa. b. The coefficient of elasticity, also known as the price elasticity of demand, indicates the responsiveness or sensitivity of the quantity demanded of a product to changes in its price. It measures the percentage change in quantity demanded relative to the percentage change in price. The magnitude of the coefficient of elasticity provides information about the degree of responsiveness of demand to price changes: 1. If the coefficient of elasticity is greater than 1 (in absolute value), the demand is considered elastic. This means that a percentage change in price will result in a larger percentage change in quantity demanded. In other words, consumers are very responsive to price changes, and a small change in price can lead to a relatively large change in demand. 2. If the coefficient of elasticity is less than 1 (in absolute value), the demand is considered inelastic. This means that a percentage change in price will result in a smaller percentage change in quantity demanded. In this case, consumers are less responsive to price changes, and a change in price will have a relatively smaller impact on demand. 3. If the coefficient of elasticity is exactly 1, it indicates unitary elasticity. This means that a percentage change in price will result in an equal percentage change in quantity

demanded. The relative change in price and quantity demanded are proportional to each other. The coefficient of elasticity provides important insights for businesses and policymakers. It helps in understanding how changes in price will affect demand and, consequently, revenue. For example, if demand is elastic, reducing prices can lead to a significant increase in total revenue. On the other hand, if demand is inelastic, raising prices may result in higher revenue despite a decrease in quantity demanded. Overall, the coefficient of elasticity is a crucial measure in economics that quantifies the responsiveness of demand to changes in price, providing valuable information for pricing decisions and market analysis. 2. Based on the given elasticities: o Price elasticity of demand (PED) = 2: This indicates that a 1% decrease in price will result in a 2% increase in quantity demanded. The demand for Volkswagen Beetles is elastic. o Income elasticity of demand (YED) = 1.5: This indicates that a 1% increase in consumer income will result in a 1.5% increase in quantity demanded. The demand for Volkswagen Beetles is income elastic. Now let's answer the questions: A. What will happen if the price of Volkswagen Beetles is reduced by 10%? Based on the price elasticity of demand (PED) of 2, a 10% decrease in price will lead to a proportional increase in quantity demanded. Specifically, the quantity demanded will increase by 2 times the percentage decrease in price. In this case, a 10% decrease in price will result in a 20% increase in quantity demanded for Volkswagen Beetles. B. What will happen to the price and quantity of Beetles if consumer income increases?

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Based on the income elasticity of demand (YED) of 1.5, a 1% increase in consumer income will result in a 1.5% increase in quantity demanded for Volkswagen Beetles. Therefore, if consumer income increases, the quantity demanded for Beetles will also increase. However, the information provided does not specify the impact on price. The price of Beetles may or may not change. It depends on various factors such as production costs, competition, and market dynamics. Chapter 9 A. Constant Marginal Cost: Constant marginal cost refers to a situation where the additional cost incurred to produce one more unit of a product remains the same. In other words, the cost per unit of output remains constant regardless of the quantity produced. For example, if a company produces t-shirts and each additional t-shirt requires the same amount of fabric, labor, and other resources, then the marginal cost of producing each t-shirt would be constant. B. Implicit Cost: Implicit cost refers to the opportunity cost of utilizing resources owned by a firm without any direct monetary expenditure. It represents the value of resources used in alternative ways or the foregone opportunity in business decision-making. For instance, if an entrepreneur starts their own business instead of taking a job with a salary, the implicit cost would be the forgone salary they could have earned. C. Risk Aversion: Risk aversion refers to a person's tendency to prefer lower-risk options over higher-risk options, even if the higher-risk option offers potentially higher rewards. Risk-averse individuals prioritize minimizing potential losses rather than maximizing gains. For example, a risk-averse investor may choose to invest in low-risk government bonds instead of high-risk stocks to avoid the volatility and potential losses associated with the stock market. D. Sunk Cost: A sunk cost is a cost that has already been incurred and cannot be recovered or changed by present or future actions. Sunk costs should be irrelevant to decision-making because they cannot be changed. An example of a sunk cost is if a company has already spent a significant amount of money on research and development for a product that turned out to be unsuccessful. The money spent on R&D is a sunk cost because it cannot be recovered, and future decisions should not be influenced by it.

E. Optimal Quantity: Optimal quantity refers to the quantity of a good or service that maximizes a particular objective, such as profit or utility. It represents the level of output where the benefits are maximized, or the costs are minimized. For example, a company may analyze its production and sales data to determine the optimal quantity of a product that maximizes its profit by finding the point where marginal revenue equals marginal cost. Chapter 10 (a) If good X is cheaper than good Y, and a consumer decides to consume more of good X and less of good Y, the effect is known as substitution effect. (b) If the price of a good goes down and a consumer decides to consume more of that good, the effect is known as the income effect. (c) If a consumer's income goes up and the consumer consumes less of good M, good M is known as an inferior good. (d) A consumer's budget line assumes that the consumer spends all of their income. Chapter 11

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