Week 3

Managerial Economics

Order of Business

• Homework

• Assigned Lectures

• Other Material

• Lectures for Next Week

Homework

Question 1. ( 20 points)

(20%) Pashigian, p 41, Exercise 1-4

Question 2. ( 20 points)

(20%) Pashigian, p 41, Exercise 1-5

Question 3. ( 10 points)(10%) A commodity has a demand function Q = 50 - 2 p. Compute the point price elasticity when the Q = 20.

Q

PSlope)(

Point Elasticity of Demand

• The point elasticity of demand is defined by

Where Slope is the slope of the demand function

Quantity

iceSlope

Pr

Question 4. ( 10 points)(10%) A commodity has a demand function Q = 50 - 2 p. Compute the arc price elasticity over the range Q = 20 to Q = 25.

)(5.0

)(5.0

21

21

PPPQQ

Q

Q = 100 – 2PP

Q

50

100

20

60 64

18

Arc Elasticity

))((

))((

121

1

121

1

o

o

o

PP

PoPQQ

QQ

Question 5. ( 10 points) (10%) A government study has concluded that the demand for a commodity isPrice Quantity10 2512 1916 12Compute the arc price elasticity when p changes from 12 to 16; when p changes from 16 to 12.

Question 5. ( 10 points) (10%) A government study has concluded that the demand for a commodity isPrice Quantity10 2512 1916 12Compute the arc price elasticity when p changes from 12 to 16; when p changes from 16 to 12.

)(5.0

)(5.0

21

21

PPPQQ

Q

Question 6. ( 15 points)(15%) What would be the shape of indifference curves between Cours and Budweiser Beers for someone who is believes "A beer is a beer is a beer"

Question 6. ( 15 points)(15%) What would be the shape of indifference curves between Cours and Budweiser Beers for someone who is believes "A beer is a beer is a beer"

C

B

First Example

• We are going to do some special cases to illustrate how some special indifference curves look.

• I don’t care whether you have Coke® or Pepsi®, as long as it is cola.

• This is a case we talked about earlier, corresponding to perfect substitutes.

Coke and Pepsi

\

Coke

Pepsi

1

5

7

2

4

3

8

6

Coke and Pepsi

\

Coke

Pepsi

1

5

7

2

4

3

8

6

Coke and Pepsi

\

Coke

Pepsi

1

5

7

2

4

3

8

6

I1

Coke and Pepsi

\

Coke

Pepsi

1

5

7

2

4

3

8

6

I1

I2

Coke and Pepsi

\

Coke

Pepsi

1

5

7

2

4

3

8

6

I1

I2

I3

Question 7. ( 15 points)

(15%) Explain why different people can have different indifference curves; why one individuals indifference curves can never cross".

Theory of Choice

• Assumption of Completeness

• Assumption of Transitivity

• More is Better than Less– If Basket A contains more than Basket B, then

A is preferred to B

Assigned Lectures

• Elasticity

• The Theory of Choice

• More on the Theory of Choice

• More Applications of Indifference Curves

Elasticity

The Theory of Choice

More on the Theory of Choice

More Applications of Indifference Curves

Lectures for Next 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