CHENNAI MATHEMATICAL INSTITUTE

ECONOMICS 2011

ASSIGNMENT 1

Supply and Demand, Elasticities, Preferences and Utility Functions

This assignment will be assessed. Work individually or in groups. Please hand in the
completed assignment next Tuesday. Cheers.

1. The demand function for movies is Q1 = 120 ! p for college students and
Q2 = 120 ! 2 p for other town residents. What is the town’s total demand
function?
2. Consider the following demand and supply relationships in the market for golf
balls: Q d = 90 ! 2 P ! 2C and Q s = !9 + 5 P ! 2.5 R , where C is the price of
golf clubs and R is the price of rubber.
a. If R = 2 and C = 10, calculate the equilibrium price and quantity of golf
balls.
b. At the equilibrium values, calculate the price elasticity of demand and
the price elasticity of supply.
c. At the equilibrium values, calculate the cross price elasticity of demand
for golf balls with respect to the price of golf clubs. What does the sign of this
elasticity tell you about whether golf balls and golf clubs are substitutes or
complements?
3. Consider two demand curves that have the same vertical intercepts (i.e.
identical “choke” prices). That is, their inverse demand functions can be
written as p1 = a ! bq1 and p 2 = a ! dq 2 . Fix an arbitrary price p and
compute the price elasticities at that price (e.g. at points like A and B on the
graph). Show that these price elasticities are the same.

D2
D1

A B
p

Q
4. Draw the indifference curves to represent the following types of consumer
preferences
a. I like both peanut butter and jelly, and always get the same additional
satisfaction from an ounce of peanut butter as I do from 2 ounces of jelly.
b. I like peanut butter, but neither like nor dislike jelly.
c. I like peanut butter, but I dislike jelly.
d. I prefer a combination of 1 ounce of peanut butter and 1 ounce of jelly
to 2 ounces of just peanut butter or 2 ounces of just jelly.
5. Consider the utility function U = x 0.2 y 0.3 .
a. Compute the marginal utilities.
b. Is the assumption “more is better” satisfied for both goods?
c. Does the marginal utility of x diminish, remain constant or increase as
the consumer buys more x?
d. What is the marginal rate of substitution?