Download Economic Analysis of Consumer Behavior: Demand Function and Elasticity - Prof. Thomas Mars and more Assignments Economics in PDF only on Docsity! 1 Key Assignment 1. 1-10 Effectively, this question boils down to the question of whether it is a good investment to spend an extra $100 on a refrigerator that will save you $25 at the end of each year for five years. The net present value of this investment is ( ) ( ) ( ) ( )2 3 4 5 $25 $25 $25 $25 $25 $100 1.05 1.05 1.05 1.05 1.05 $108.24 $100 $8.24. NPV = + + + + โ = โ = You should buy the energy efficient model, since doing so saves you $8.24 in present value terms. 1-12 a. Accounting costs equal $3,160,000 per year in overhead and operating expenses. Her implicit cost is the $56,000 salary that must be given up to start the new business. Her opportunity cost includes both implicit and explicit costs: $3,160,000 + $56,000 = $3,216,000. b. To earn positive accounting profits, the revenues per year should greater than $3,160,000. To earn positive economic profits, the revenues per year must be greater than $3,216,000. c. 2-4 a. Good Y is a substitute for X, while good Z is a complement for X. b. X is a normal good. c. ( ) ( ) ( ) ( ) 000,5000,55$ 10 190$8900,5$ 4 1910,4$ 2 1200,1 =+โ+โ=dxQ d. For the given income and prices of other goods, the demand function for good X is ( ) ( ) ( )1 1 11, 200 $5,900 8 $90 $55,000 , 2 4 10 d x xQ P= โ + โ + which simplifies to 7, 455 0.5dx xQ P= โ . To find the inverse demand equation, solve for price to obtain 14,910 2 .dx xP Q= โ The demand function is graphed in Figure 2-2. 2 $0 $2,982 $5,964 $8,946 $11,928 $14,910 0 1000 2000 3000 4000 5000 6000 7000 8000 Quantity of X Price of X Demand Figure 2-2 2-5 e. Solve the demand function for xP to obtain the following inverse demand function: 1115 4 d x xP Q= โ . f. Notice that when $35xP = , ( )460 4 35 320dxQ = โ = units. Also, from part a, we know the vertical intercept of the inverse demand equation is 115. Thus, consumer surplus is $12,800 (computed as ( ) ( ).5 $115 $35 320 $12,800โ = ). g. When price decreases to $25, quantity demanded increases to 360 units, so consumer surplus increases to $16,200 (computed as ( ) ( ).5 $115 $25 360 $16, 200โ = ). h. So long as the law of demand holds, a decrease in price leads to an increase in consumer surplus, and vice versa. In general, there is an inverse relationship between the price of a product and consumer surplus.
