PRINCIPLES, PROBLEMS AND POLICIES BY McConnel, Brue and Flynn ISBN 978-0-07-802175-6

Currently, at a price of $1 each 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit-elastic (E1 = 1.0). So how many popsicles will be sold each day in the short run if the price rises to $2 each? In the long run, a price increase from $1 to $2 has an elasticity of supply of 1.50. So how many popsicles will be sold per day in the long run if the price rises to $2 each? (Hint: Apply the midpoints approach to the elasticity of supply)

6

Units of X Mu x, Units of Y MUy

1 10 1 8

2 8 2 7

3 6 3 6

4 4 4 5

5 3 5 4

6 2 6 3

ADVANCED ANALYSIS. Let MU A = z = 10 x and MU B = z = 21 2y where z is marginal utility per dollar measured in until, x is the amount spent on product A, and y is the amount open on product B. Assume that the consumer has $10 to spend on A and B- that is, x + y = 10. How is the $10 best allocated between A and B? How much utility will the marginal dollar yield?