ST. AUGUSTINE

FACULTY OF SOCIAL SCIENCES

DEPARTMENT OF ECONOMICS

ECON2000: INTERMEDIATE MICROECONOMICS I – 2012/13

TUTORIAL SHEET 1

THE THEORY OF CONSUMER BEHAVIOUR

PROBLEMS

1.The following data represent 5 points on the supply curve for orange juice:

PRICE ($ PER GALLON)QUANTITY (MILLIONS OF GALLONS)

1 100

2 300

3 500

4 700

5 900

and these data represent 5 points on the demand curve for orange juice:

PRICE ($ PER GALLON)QUANTITY (MILLIONS OF GALLONS)

1 700

2 600

3 500

4 400

5 300

a. Graph the points of these supply and demand curves for orange juice. Be sure to put price on the vertical axis and quantity on the horizontal axis.

b. Do these points seem to lie along two straight lines? If so, figure out the precise algebraic equation of these lines. (Hint: If the points do lie on straight lines, you need only consider two points on each of them to calculate the lines.)

c. Use your solutions from part b to calculate the ‘‘excess demand’’ for orange juice if the market price is zero.

d. Use your solutions from part b to calculate the ‘‘excess supply’’ of orange juice if the orange juice price is $6 per gallon.

2 Marshall defined an equilibrium price as one at which the quantity demanded equals the quantity supplied.

a. Using the data provided in problem 1.1, show that P = 3 is the equilibrium price in the orange juice market.

b. Using these data, explain why P = 2 and P = 4 are not equilibrium prices.

c. Graph your results and show that the supply demand equilibrium resembles that shown in Figure 1.3.

d. Suppose the demand for orange juice were to increase so that people want to buy 300 million more gallons at every price. How would that change the data in problem 1.1?

How would it shift the demand curve you drew in part c?

e. What is the new equilibrium price in the orange juice market, given this increase in demand? Show this new equilibrium in your supply demand graph.

f. Suppose now that a freeze in Florida reduces orange juice supply by 300 million gallons at every price listed in problem 1.1. How would this shift in supply affect the data in problem 1.1? How would it affect the algebraic supply curve calculated in that problem?

g. Given this new supply relationship together with the demand relationship shown in problem 1, what is the equilibrium price in this market?

h. Explain why P = 3 is no longer an equilibrium in the orange juice market. How would the participants in this market know P = 3 is no longer an equilibrium?

i. Graph your results for this supply shift.

3. Suppose a person has $8.00 to spend only on apples and bananas. Apples cost $.40 each, and bananas cost $.10 each.

a. If this person buys only apples, how many can be bought?

b. If this person buys only bananas, how many can be bought?

c. If the person were to buy 10 apples, how many bananas could be bought with the funds leftover?

d. If the person consumes one less apple (that is, nine), how many more bananas could be bought? Is this rate of trade-off the same no matter how many apples are relinquished?

e. Write down the algebraic equation for this person’s budget constraint, and graph it showing the points mentioned in parts a through d (using graph paper might improve the accuracy of your work).

4. Suppose the person faced with the budget constraint described in problem 2.1 has preferences for apples (A) and bananas (B) given by

Utility = A .B

a. If A = 5 and B = 80, what will utility be?

b. If A =10, what value for B will provide the same utility as in part a?

c. If A = 20, what value for B will provide the same utility as in parts a and b?

d.Graph the indifference curve implied by parts a through c.

e. Given the budget constraint from problem 2.1, which of the points identified in parts a through c can...