Strayer ECO301 week 2 homework

Click the link above to submit the assignment.Week 2 Homework Problems:Chapter 3: 3.2(a-e), 3.4(a-f), 3.6(a-d), 3.8(a-d), 3.10(a-f)Chapter 4: 4.1(a-c), 4.4(a-d), 4.7(a-c), 4.9(a-d), 4.10(a-b)Note: Homework problems are worth 2 points for each part of the problem.
3.
Suppose that the demand curve
for garbanzo beans is given by
Q =
20?P
Where Q is thousands of pounds of beans bought per week and P is the
price in dollars per pound.
a.)
How many beans will be bought
at P = 0 ?
b.)
At what price does the quantity
demanded of beans become 0 ?
c.)
Calculate total expenditures (P?Q)
for beans of each whole dollar price between the prices identified in part a
and part b.
d.)
What price for beans yields the
highest total expenditures ?
e.)
Suppose the demand for beans
shifted to Q = 40?2P . How would your answers to part a through part d change? Explain
the differences intuitively and with a graph.

3.4
Irene’s demand for pizza is given
by:
Q = 0:3I / P
Where Q is the weekly quantity of pizza bought (in slices), I is weekly income,
and P is the price of pizza. Using this demand function, answer the following:
a. Is this function homogeneous in I and P?
b. Graph this function for the case I = 200.
c. One problem in using this function to study consumer surplus is that Q never
reaches zero, no matter how high P is. Hence, suppose that the function holds
only for P ? 10 and that Q = 0 for P > 10. How should your graph in part b
be adjusted to fit this

3.6
The residents of Uurp consume only pork chops (X) and Coca-Cola
(Y). The utility function for the typical resident of Uurp is given by . In
2009, the price of pork chops in Uurp was $1 each; Cokes were also $1 each. The
typical resident consumed 40 pork chops and 40 Cokes (saving is impossible in
Uurp). In 2010, Swine fever hit Uurp and pork chop price rose to $4; the Coke
price remained unchanged. At these new prices, the typical Uurp resident
consumed 20 pork chops and 80 Cokes.

a. show that the utility for the typical Uurp
resident was unchanged between the 2 years.
b. show that using 2005 prices would show an
increase in real income between the 2 years.
c. show that using 2006 prices would show a
decrease in real income between the years.
d. what do you conclude about the ability of these
indexes to measure changes in real income?

3.8
Tom, Dick, and Harry constitutes the entire market for
scrod. Tom’s demand curve is given by
Q1 = 100 – 2P
For P ? 50. For P > 50, Q1 = 0. Dick’s demand curve is given by
Q2 = 160 – 4P
For P ? 40. For P > 40, Q2 = 0. Harry’s demand curve is given by
Q3 = 150 – 5P
For P ? 30. For P > 30, Q3 = 0. Using this information, answer the following:
a. How much scrod is demanded by each person at P = 50? At P = 35? At P = 25?
At P = 10? And at P = 0?
b. What is the total market demand for scrod at each of the prices specified in
part a?
c. Graph each individual’s demand curve.
d. Use the individual demand curves and the results of part b to construct the
total market demand for scrod.

3.10
Consider the linear demand curve shown in the following
figure. There is a geometric way of calculating the price elasticity of demand
for this curve at any arbitrary point (say point E). To do so, first write the
algebraic form of this demand curve as Q = a + bP.

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a. With this demand function, what is the value of P for which Q = 0?
b. Use your results from part a together with the fact that distance X in the
figure is given by the current price, P*, to show that distance Y is given by –
Q*/b (remember, b is negative here, so this really is a positive distance).
c. To make further progress on this problem, we need to prove Equation in the
text. To do so, write the definition of price elasticity as:
eQ,P = % change in Q/% change in P = ?Q/Q/?P / P = ?Q/? P · P/Q.
Now use the fact that the demand curve is linear to prove Equation.
d. Use the result from part c to show that |eQ, P| = X/Y. We use the absolute
value of the price elasticity here because that elasticity is negative, but the
distances X and Y are positive.
e. Explain how the result of part d can be used to demonstrate how the price of
elasticity of demand changes as one moves along a linear demand curve.
f. Explain how the results of part c might be used to approximate the price
elasticity of demand at any point on a nonlinear demandcurve.

Chapter 4

Problem 4.1
Suppose a person must accept one of three bets:
Bet 1: Win $100 with probability ½; lose $100 with probability ½.
Bet 2: Win $100 with probability ¾; lose $300 with probability ¼.
Bet 3: Win $100 with probability 9/10; lose $900 with probability 1/10.
a. Show that all of these are fair bets.
b. Graph each bet on a utility of income curve similar to Figure.

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c. Explain carefully which bet will be preferred andwhy.

4.4
Suppose there is a 50-50 chance that a risk
averse individual with a current wealth of $40.000 will contract a debilitating
disease and suffer a loss of $10.000.

(a) Calculate the cost of actuarially fair
insurance in this situation and use a utility of wealth graph to show that the
individual will prefer fair insurance against this loss to accepting the gamble
uninsured.

(b)
Suppose two types of insurance policies were available:
1.
a fair policy covering the complete loss; and
2.
a fair policy covering only half of any loss incurred.

Calculate
the cost of the second type of policy and show that the individual will
generally regard it as inferior to the first.

4.7

Suppose Molly Jock
wishes to purchase a high definition television to watch the Olympic wrestling
competition in London. Her current income is $20,000, and she knows where she
can buy the television she wants for $2,000. She had heard the rumor that the
same set can be bought at Crazy Eddie’s (recently out of bankruptcy) for $1,700
but is unsure if the rumor is true. Suppose this individual’s utility is given
by
Utility = ln(Y)
Where Y is her
income after buying the television.
a. What is Molly is
utility if she buys from the location she knows?
b. What is Molly is
utility if Crazy Eddie’s really does offer a lower price?
c. Suppose Molly
believes there is a 50-50 chance that Crazy Eddie does offer the lower-priced
television, but it will cost her $100 to drive to the discount store to find
out for sure (the store is far away and has had its phone disconnected). Is it
worth it to her to invest the money in the trip?

4.9
The option on Microsoft
stock described in Application 4.4 gave the owner the right to buy one share at
$27 one month from now. Microsoft currently sells for $25 per share, and
investors believe there is a 50-50 chance that it could become either $30 or
$20 in one month. Now let us see how various features of this option affect its
value:
a. How would an increase in the strike price of the option, from $27 to $28,
affect the value of the option?

4.10
In this problem, you will see why the ‘‘Equity Premium
Puzzle’’ described in Application 4.5 really is a puzzle. Suppose that a person
with $100,000 to invest believes that stocks will have a real return over the
next year of 7 percent. He or she also believes that bonds will have a real
return of 2 percent over the next year. This person believes (probably contrary
to fact) that the real return on bonds is certain—an investment in bonds will
definitely yield 2 percent. For stocks, however, he or she believes that there
is a 50 percent chance that stocks will yield 16 percent, but also a 50 percent
chance they will yield -2 percent. Hence, stocks are viewed as being much
riskier than bonds.
a. Calculate the certainty equivalent yield for stocks using the three utility
functions in Problem 4.6. What do you conclude about whether this person will
invest the $100,000 in stocks or bonds?
b. The most risk-averse utility function economists usually ever encounter is
U(I) = -I-10. If your scientific calculator is up to the task, calculate the
certainty equivalent yield for stocks with this utility function. What do you
conclude?