Author Question: Which of the following refers to a shift in the demand curve? A) This new advertising campaign ... (Read 69 times)

Arii_bell · **on:** Jul 1, 2018

Which of the following refers to a shift in the demand curve?

A) This new advertising campaign should really increase our demand.
B) Let's drop our price to increase our demand.
C) We dare not raise our price because our demand will drop.
D) If new sellers enter the market, the demand for the product is bound to increase.

Question 2

Sarah and Andrew are two traders in a pure exchange economic with two goods, Bikes (B) and Computers (C). Sarah's preferences are described by the Cobb-Douglas Utility function:

US = BS1/3CS2/3
Andrew's preferences are given by:
UA = BA1/2CA1/2
Assume the price of Bikes is 1 and the price of computers is p. The initial endowments are BA = 10, BS = 20, CA = 20 and CS = 10. Solve for the competitive equilibrium prices (relative prices) and quantities.

mohan · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

A

Answer to Question 2

Determine the demand equations using the incomes and preferences. Sarah's income is:
20 + 10p = YS
Her demand curves are:
BS = YS/3 = (20 + 10p)/3
CS = 2YS/3p = (40 + 20p)/3p
Andrew's income is:
10 + 20p = YA
His demand curves are:
BA = YA/2 = 5 + 10p
CA = YA/2p = (5 + 10p)/p
Setting supply (BA + BS = 30 ) equal to demand:
30 = (20 + 10p)/3 + 5 + 10p
Solving:
p = 55/40(Equating the supply and demand for computers yields the same result.)