Economics Problem Solving

ECONOMICS PROBLEM SOLVING 5

EconomicsProblem Solving

ProblemA

Priceelasticity of supply = % change in quantity supplied /% change inprice

=(222-200)/ 200

=0.11

(12000-10000)/10000

=0.2

Priceelasticity of supply = 0.2/0.11

=1.82

Sincethe elasticity is greater than 1, the n the price elasticity ofsupply is elastic.

ProblemB

Publicgoods are goods that are consumed without excluding individuals fromtheir consumption and are non-rivalry that is they are available forall individuals to consume. The principal characteristics of publicgoods are their non-excludability and non-rivalry (Hyman,2010). On the other hand, private goods are those goods that anindividual can be excluded from consuming if he/she does not have thepurchasing ability (Hyman,2010). Private goods are characterized by their rivalry nature andexclusion principle. There is a free rider problem, when it comes topublic goods because it is not possible to exclude individuals fromthe consumption of public goods, thus they benefit from the goodswithout paying for them (Hyman,2010). Local police force entails a public good because it is notpossible to exclude individuals from receiving the services of thelocal police force. A local TV service is a private good because itis possible to exclude individuals from using the service if they donot have the ability to pay for it.

ProblemC

Formaximum satisfaction, marginal utility of product A is equal tomarginal utility of product B that is, MUA = MUB

20-x= 42-4y

4y-x=22……..(i)

Constraint:x+y =20………. (ii)

Solvingequations (i) and (ii) simultaneously yields the values of x and y

4y– x = 22

Y+ x = 20

5y= 42

Y= 8.4

X= 20 – 8.4

X= 11.6

Marginalutility per dollar = 20 – x or 42 – 4y

=8.4

Thebest way to allocate the expenditure of $20 is spending $11.6 onproduct A and $8.4 on product B.

References

Hyman,D. N. (2010).&nbspPublicfinance: A contemporary application of theory.Australia: South-Western Cengage Learning, c2010, 2011.