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Lecture 11

Lecture 11-Review

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

Description
Thursday, October 22nd, 2009. Review Opportunity Costs You choose to attend university for one year. Tuition and books cost $5000. Room and board cost $7500. What is the opportunity cost of attending university if next best alternative is: 1) To work and earn $25000 while living at home, where room and board is free $12,500 25,000 $37,500 2) To work and earn $25000 while sharing an apartment and paying $7500 for room and board $ 5,000 25,000 $30,000 3) to travel for a year, which is free because your uncle will pay $12500 Satisfaction from Travel 4) to travel for a year, which will cost $20,000 $12,500 Satisfaction - 20,000 Satisfaction - $7,500 The following are the elasticities for Volkswagen Beetles: Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. True or False? a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20% (T) b. An increase in consumer income will increase the price and quantity of Beetles. Since price elasticity of demand is greater than 1, total revenue will go down. (F) www.notesolution.com TR1 = P1 * Q1 > TR0 = P0 * Q0 Elasticity of demand refers to movement along a demand curve and is not relevant when assessing shift in demand curve ³$GURXJKWDURXQGWKHZRUOGUDLVHVWhe total revenue that farmer around the world receive from the sale of grain, but a drought only in Saskatchewan reduces the total UHYHQXHWKDW6DVNDWFKHZDQIDUPHUVUHFHLYH´ Could this be true? YES (**must always explain on the tests) Impact on World Drought on Grain Market If world demand is inelastic, P1 * Q1 > P0 * Q0 Æ total farm revenue increases Q0 Q1 P0 P1 Q P SS DD DD1 Beetles Q1 Q0 P0 P1 Q P SS DD SS1 After Drought Q0 P0 Q P SS DD Before Drought SS = world supply DD = world demand www.notesolution.com Saskatchewan Drought 1. Saskatchewan production of grain is so small relative to world production that world supply is (essentially) unaffected Æ price remains at P0 2. Saskatchewan framers produce less grain, sell at unchanged world price, so total revenue of Saskatchewan farmers declines P0 = world price (unchanged) TR (before drought): TR0 = P0 * Q0 TR (after drought): TR1 = P1 * Q1 Squid costs $2/kilogram and octopus costs $1/kilogram. Jacques buys only octopus and gets 10 units of utility from the last kilogram he buys. Assuming that Jacques has maximized his utility, his marginal utility (in units) from the first kilogram of squid must be: A) more than 10. B) Less than 10. C) More than 20. D) Less than 20. E) Zero. Octopus: MUp (last unit consumed) = 10 P0 = 1 MU0 = 10 = 10 P0 1 Q0 SS P0 Q1 SS1 www.notesolution.com Squid: Not consumed => MUs < 10 Ps Ps = 2 MUs (first unit) < 20 A Pizza Puzzle A local pizza parlour offers an all-you-can-eat lunch for $3. You pay at the door, and then the waiter brings you as many slices of pizza as you like. A large number of students enter the pizza parlour. As they enter, one-half of these students are immediately awarded D³prize´± a refund of the $3 Question: :KLFKJURXSRIVWXGHQWVWKRVHZKRGLGRUWKRVHZKRGLGQRWJHWWKH³SUL]H´GRHVeconomic theory predict will eat the most slices of pizza? The Pizza Problem 1. Once student has paid $3 (regardless of whether student obtains refund) P = 0 2. Rational student consumes slices of pizza until MU = 0 3. Prediction: both groups will consume the same amount of pizza www.notesolution.comnd Thursday, October 22 , 2009. Review Opportunity Costs You choose to attend university for one year. Tuition and books cost $5000. Room and board cost $7500. What is the opportunity cost of attending university if next best alternative is: 1) To work and earn $25000 while living at home, where room and board is free $12,500 25,000 $37,500 2) To work and earn $25000 while sharing an apartment and paying $7500 for room and board $ 5,000 25,000 $30,000 3) to travel for a year, which is free because your uncle will pay $12500 Satisfaction from Travel 4) to travel for a year, which will cost $20,000 $12,500 Satisfaction - 20,000 Satisfaction - $7,500 The following are the elasticities for Volkswagen Beetles: Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. True or False? a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20% (T) b. An increase in consumer income will increase the price and quantity of Beetles. Since price elasticity of demand is greater than 1, total revenue will go down. (F) www.notesolution.com
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