There are 40 people living in a village each having preference over apples and shirts represented by U(a,b) = a1/3s2/3, where a and s are amount of apples in pounds and shirts consumed, respectively. The price of a shirt is $10. Each villager has $300 income. Apples are supplied to the village by a farmer, whose supply function is S(pa) = 1000pa. Part 1 What is the equilibrium price of apples? How many pounds of apples does each villager consume? Part 2 What is the aggregate net consumer surplus at the equilibrium? Part 3 What is the price elasticity of demand at the equilibrium?
There are 40 people living in a village each having preference over apples and
shirts represented by U(a,b) = a1/3s2/3, where a and s are amount of apples
in pounds and shirts consumed, respectively. The
Part 1
What is the
villager consume?
Part 2
What is the aggregate net
Part 3
What is the
Part b1
Suppose 50 more people move in to the village. What is the equilibrium price
now?
Part b2
Are consumers better or worse off now? Why? If a consumer is worse off, by
how much additional income he/she needs to be compensated in order to be as
well off as in Part a.
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