Question

1. What is the relationship between price elasticity of demand and revenues? How do you find the elasticity at any point on a linear demand curve?

2. What is the marginal utility of a dollar? How does our understanding of the rational consumer allow us to interpret demand as a schedule of marginal benefits?

3. Solve the consumer’s problem when utility is logarithmic, so that the marginal utility of an apple, say, is equal to 1/Qa, where Qa is the quantity of apples consumed. Use the rational spending rule and the budget constraint, given the consumer’s income and the prices of the two goods, to determine the quantities the consumer would consume, how those quantities will change when the price of one of the goods changes, and the income and substitution effects of the change.

4. Why is it that in equilibrium all the consumers of a good place the same marginal value on the good. Does this imply that the marginal utility of the good is the same for each? Understand and be able to critically evaluate the utilitarian argument for equal distribution based on the idea of diminishing marginal utility.

Answer 1

Ans1) total revenue is equal to price multipled by number of units sold. When percentage change in quantity demanded is greater than percentage change in price, the demand is price Elastic and total revenue will move in the same direction as quantity. When percentage change in quantity is less than percentage change in price, the demand is inelastic and total revenue will move in the same direction as price

Elasticity at any point on a linear demand curveas the ratio of the percentage change in quantity to the percentage change in price.