1. The accompanying table shows the price and yearly quantity sold of ice cream cones on Sidfield Island.
Price of Ice Cream Cones Quantity of Ice Cream Cones Demanded
$1 3000
$2 2400
$3 1600
$4 800
a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $1 to $2. What does this estimate imply about the price elasticity of demand for ice cream cones?
b. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. What does this estimate imply about the price elasticity of demand for ice cream cones?
c. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?
2. Newspaper vending machines are designed so that once you have paid for one paper; you have access to all the papers in the machine and could take multiple papers at a time. However, other vending machines dispense only one item (the item you bought). You do not have access to all the goods (sodas, candy, snacks, etc.) at one time. Using the concept of marginal utility, explain why these vending machines differ?
3. Amy is shopping at a dollar store. She is currently buying 5 bracelets that cost $1 each and 4 sodas that cost $1 each. The table below indicates the marginal utility she obtains when she purchases this combination.
Quantity Price per Unit MU per unit
Bracelets 5 $1 30
Sodas 4 $1 40
a. A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is this consumer maximizing her utility?
b. If not, should she consume more bracelets or more sodas? Explain.
Answer the following assuming that one more bracelet is purchased and one less soda is consumed:
c. Recall the law of diminishing marginal utility. What happens to the Marginal Utility of bracelets and the Marginal Utility of soda?
d. What happens to the Total Utility received?
e. What happens to the total dollars spent?