Week 4

Managerial Economics

Order of Business

• Homework

• Assigned Lectures

• Other Material

• Lectures for Next Week

Homework

Pashigian, p 86, Exercise 2-2

Year PX Q PY Income 1987 100 80 50 20,000 1988 110 90 40 18,000 1989 90 100 40 18,000 1990 100 100 50 20,000 1991 100 90 40 20,000 1992 100 110 40 25,000

Year PX Q PY Income 1987 100 80 50 20,000 1988 110 90 40 18,000 1989 90 100 40 18,000 1990 100 100 50 20,000 1991 100 90 40 20,000 1992 100 110 40 25,000

Years to calculate

Year PX Q PY Income 1987 100 80 50 20,000 1988 110 90 40 18,000 1989 90 100 40 18,000 1990 100 100 50 20,000 1991 100 90 40 20,000 1992 100 110 40 25,000

Bias due to changes in preferences

Year PX Q PY Income 1987 100 80 50 20,000 1988 110 90 40 18,000 1989 90 100 40 18,000 1990 100 100 50 20,000 1991 100 90 40 20,000 1992 100 110 40 25,000

Complements or Substitutes

Year PX Q PY Income 1987 100 80 50 20,000 1988 110 90 40 18,000 1989 90 100 40 18,000 1990 100 100 50 20,000 1991 100 90 40 20,000 1992 100 110 40 25,000

Price elasticity of Y; no year

Suppose the demand function for a product is Q = 150 - 12p. Compute the point elasticity of demand at Q = 30. Then compute the arc price elasticity of demand over the interval Q= 40 to Q = 30; over the interval Q = 31 to Q = 30; over the interval Q = 30.1 to Q = 30. Comment on the pattern of these price elasticities.

430

1012

Pr

Quantity

iceSlope

Q-High Q-Low P-High P-Low Eta40.0 30 9.17 10 -3.2857131.0 30 9.92 10 -3.9180330.1 30 9.99 10 -3.99168

Explain whether you agree or disagree with the following statement: An economist would classify a new automobile that does not start in cold weather as an inferior good. (Apologies for giving this question given the recent weather, but it IS a good question).

Explain whether you agree or disagree with the following statement: An economist would classify a new automobile that does not start in cold weather as an inferior good. (Apologies for giving this question given the recent weather, but it IS a good question).

Does the quantity demanded increase or decrease with

income?

Suppose the demand function for a product is Q = 150 - 12p. The good is currently selling for $5. Compute consumer surplus. Then compute the deadweight loss if the government imposes a tax of $2 on each unit sold.

Q=150-12P

$5

90

Q=150-12P

$5

90

$12.5

7.5

90

Q=150-12P

$5

90

$12.5

7.5

90

Q=150-12P

$5

$90

$12.5

7.5

90

50.337$)5.7)(90(2

1

2

1 BHCS

Q=150-12P

$5

90

$12.5

$7

66

Q=150-12P

$5

90

$12.5

$7

66

DWL=$24

A consumer does not subscribe to satellite TV, and lives in an area where there is no cable TV. Describe in words the shape of his indifference curves between satellite TV and other goods. Tell me what you can tell about their shape?

OG

S

He gets more utility from doing without satellite TV than he would with.

Lectures for this Week

• The Economics of Bads

• The Value of Time

• Consumer Surplus

• Applying Consumer Surplus

• Consumer Surplus and Deadweight Loss

• More on Consumer Surplus

The Economics of Bads

The Value of Time

Consumer Surplus

Applying Consumer

Surplus

Consumer Surplus and Deadweight

Loss

More on Consumer

Surplus

Lectures for Next Week

• Consumer Surplus and Indifference Curves• Priceline and E-Bay• Compensated Demand Curves• Income and Substitution Effects• Uncertainty• Uncertainty and Risky Behavior• Buying Insurance• A Numerical Problem• Who Robbed C.C.

•Consumer Surplus and Indifference Curves

•Priceline and E-Bay

•Compensated Demand Curves

•Income and Substitution Effects

•Uncertainty

•Uncertainty and Risky Behavior

•Buying Insurance

•A Numerical Problem

•Who Robbed C. C.