Homework Problems #4
Due December 4
This assignment, like all others, is a learning experience. As such, you will not find the answers
easy to come by. If they were, then you wouldn't be learning anything new. However, once you
have completed the task, then you will convince yourself that you can and have learned some
complex material. Be patient with yourself and your teammate, and the rewards will come
Complete the following questions. Label all graphs completely. 10 points each.
1. Keeping in mind the MRS, explain the equilibrium condition for the consumer’s
problem. To begin with, it might help to state what the problem is. See question
#8 on page 75.
2. Explain why it is important to decompose a price change effect into the income
and substitution effects. Defining the quantity demanded might be helpful.
3. Explain, probably using some graphs, how a demand curve is derived from the
indifference curve analysis problem. Can you then also summarize how the Engel
curves are derived?
4. Use a graph, as in class, to explain the differing elasticities along a given linear
demand function. Show an elastic point and an inelastic point. Explain your graph
and the relevant changes in revenue. How can the linear demand curve be used to
estimate the elasticity at a point on any non-linear demand function?
5. A local business is in dire need of increasing revenue to make a loan payment next
month. Fully explaining the concept of elasticity of demand, make a recommendation
to the business owner. (Careful, there are two answers depending on something.
6. Using a general example, prove the profit maximizing decision rule for determining
the output level. Note: a mathematical (calculus) proof is neither necessary nor
sufficient - you must include economic definitions for the terms you use. See also
question #4 on page 405
7. Fully explain the short-run and long run adjustments – using the relevant graphs – for
the corn market beginning in long run competitive equilibrium when the cross price
elasticity between corn and potatoes is equal to +1.2 and the potato market faced
severe weather disruptions causing a several year reduction in harvests. The market
for corn is an increasing cost industry.
8. Consider the definition of a Nash Equilibrium on page 172. Can you apply the
interdependence between firms to our lengthy in-class discussion of the retail
gasoline markets? What do the concept of zero profits and entry play in overall
9. Question 16.9 on page 510.
10. Professor Greenhut argues that the most important measure in microeconomics is that
of demand elasticity. Given the Phlips determination that all firms have some
monopoly power, can you explain why Professor Greenhut is so focused on the
elasticity measures for demand? (Answering “No” is not a good strategy for points!)
Consider the markets discussed in class that price discriminate, how do the firms in
these industries utilize the elasticity measures? (Do NOT give an encyclopedic