Assignment 1 ECON PDF

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Assignment 1

1) A vegetable fiber is traded in a competitive world market, and the world price is $9 per pound. Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows: U.S. Supply (Million LBS)

U.S. Demand (Million LBS)

3

2

34

6

4

28

9

6

22

12

8

16

15

10

10

18

12

4

Price

a. What is the equation for demand? What is the equation for supply? b. At a price of $9, what is the price elasticity of demand? What is it at a price of $12? c. What is the price elasticity of supply at $9? At $12? 2) Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(F, D) = 10FD. In addition, the price of a day spent traveling domestically is $100, the price of a day spent traveling in a foreign country is $400, and Jane’s annual travel budget is $4000. a. Illustrate the indifference curve associated with a utility of 800 and the indifference curve associated with a utility of 1200. (Consider F to be on the horizontal axis and D to be on the vertical axis) b. Graph Jane’s budget line on the same graph. c. Can Jane afford any of the bundles that give her a utility of 800? What about a utility of 1200? 3) Suppose there exists two goods: clothing and food where clothing is presented on vertical axis while food on the horizontal axis. Illustrate the income and substitution effects when there is an increase in the price of food knowing that food and clothing are normal goods....