1 .a. Explain Giffen good (draw a graph). Are all inferior goods Giffen good?
b. Suppose you live on two goods. Explain why two goods cannot be inferior at the same time (hint: draw Income Consumption Curve).
2. A demand and supply curve for tickets to the Celine Dion concert is given as follows:
Demand: Qd = 200 – 4P
Suppply: Qs = 100 + P
a. At an equilibrium price, calculate the price elasticity of demand at the equilibrium price.
b. At an equilibrium price, calculate the consumer surplus (the area).
3. (challenging) Suppose gold buyers are located in New York and Zurich. At the current price of gold, $400 an ounce, total quantity demanded (QNY + Qzurich) for gold is 10,000 ounces; and the price elasticity of demand for gold in New York and Zurich are 3 and 2 respectively. The slope of each demand curve and current price of gold in New York is the same as in Zurich.
a. Find the quantity demanded for gold in New York and Zurich at the current price, respectively.
b. Find the slope of demand curve in New York (which equals that in Zurich).
4. Blanca has her choice of either a certain income of $20,000 or a gamble with a 0.5 probability of $10,000 and a 0.5 with a probability of $30,000.
a. What is the expected value of the gamble?
b. Suppose Blanca would prefer a certain income of $20,000 to the expected value of the gamble. Explain her preference toward risk by drawing a graph.