Introduction to economics

INTRODUCTION TO ECONOMICS
Yoldoshev Muhammadali
FED 3


STUDENT ID:230297

Question 1: Suppose that your demand schedule for pizza is as follows:

1. 
   Use the midpoint method to calculate your price elasticity of demand as the price of pizza increases from $8 to $10 if (i) your income is $20,000 and (ii) your income is $24,000. (20 points)
   

2. 
   Calculate your income elasticity of demand as your income increases from $20,000 to $24,000 if (i) the price is
   

$12 and (ii) the price is $16. (10 points)

Question 2: Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions.

1. 
   What happens to the price of coffee beans? (5 points)
   

2

2. 
   What happens to the price of a cup of coffee? (5 points) What happens to total expenditure on cups of coffee?
   

(5 points)

3. 
   What happens to the price of donuts? (5 points) What happens to total expenditure on donuts? (5 points)
   

Question 3: Darius buys only milk and cookies.

1. 
   In year 1, Darius earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Darius’s budget constraint. (15 points)
   

2. 
   Now suppose that all prices increase by 10 percent in year 2 and that Darius’s salary increases by 10 percent as well. Draw Darius’s new budget constraint. How would Darius’s optimal combination of milk and cookies in year 2 compare to his optimal combination in year 1? (15 points)
   

Question 4: Compare the following two pairs of goods:

• 
  Coke and Pepsi
  
• 
  Skis and ski bindings
  

1. 
   In which case are the two goods complements? In which case are they substitutes? (5 points)
   
2. 
   In which case do you expect the indifference curves to be fairly straight? In which case do you expect the indifference curves to be very bowed?
   

3. 
   c. In which case will the consumer respond more to a change in the relative price of the two goods? (10 points)