# 1. Consider the market for new cars. For each event below, state wh...

## Question

1. Consider the market for new cars. For each event below, state whether the event will shift either the demand curve for new cars or the supply curve for new cars. (Assume only one curve shifts for each event.) Explain the shift, and then explain what will happen to the equilibrium price and the equilibrium quantity of new cars. EXPLAIN EACH ANSWER THOROUGHLY.
Event 1: The economy falls into recession there is a sizeable decrease in consumer incomes.
Event 2: The price of steel, an input into the production of cars, rises.
Event 3: Consumers exhibit a preference for the styles of new cars.
Event 4: Better assembly line methods improve the production process of new cars.

2. Elasticity:
Part 1: A particular brand of tablet computer has dropped in price from \$500 to \$400. As a result, the quantity demanded per month has increased from 10,000 units to 14,000 units.
Use the method of average values (the midpoint method) to calculate the elasticity of demand for this tablet computer over the range of prices and quantities given. SHOW ALL WORK. Is the demand curve elastic, inelastic, or unitary over this range of the demand curve? Explain how you know.

Part 2: Consider the following products: 1. Salt 2. Folgers coffee
Which of these products is likely to have a more elastic demand? Explain why.
Which of these products is likely to have a more inelastic demand? Explain why.

3. Utility:
Part 1. Consider the following total utility schedule:
Quantity of the good    Total Utility (TU)    Marginal Utility (MU)
0                                              0                                -----
1                                              20
2                                              36
3                                              48
4                                              56
5                                              60
6                                              60

Write down the formula for marginal utility and fill in the column. Clearly show or explain the calculations.

Part 2: In his current situation, the marginal utility (MU) that Joe gets from the last slice of pizza is 10, and the price of a slice of pizza is \$4. The marginal utility Joe gets from the last beer is 20 units of utility, and the price of a beer is \$5. Is Joe maximizing his utility from the consumption of beer and pizza? How do you know? Explain. If Joe is NOT maximizing his utility, how should he rearrange his purchases of beer and pizza in order to increase his utility? Explain.

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