APP800: MICROECONOMICS FOR PUBLIC POLICY
ASSIGNMENT TWO:
Attempt ALL the question.
a) The daily demand for Invigorated PED shoes is estimated as follows:𝑑
𝑄𝑥 = 100 − 3𝑃𝑥 + 4𝑃𝑦 − 0.01𝑀 + 2𝐴𝑥
where 𝐴𝑥 represents the amount of advertising spent on shoes (X), Px is the price of good X, Py is
the price of good Y, and M is average income. Suppose good X sells at $25 a pair, good Y sells at
$35, the company utilizes 50 units of advertising, and average consumer income is $20,000. You
are required to calculate and interpret.
i.
The own price elasticity of demand
(3 marks)
ii.
The cross-price of demand and
(3 marks)
iii.
The income elasticity of demand.
(3 marks)
iv.
How are the two goods related support your answer
(2 marks)
b) Given a utility function U = 30X – 4Z2 + 50Z – X2
Income level Y = Ksh.54
Price of good X (Px) = Ksh.3
Price of good Z (Pz) = Ksh.6
Determine the equilibrium quantities of commodities X and Z
(4 marks)
c) A consumer spends his income of 300 on good A or on good B or on any combination
of A and B. One unit of A costs 3 and one unit of B 5.
(i)
Draw a budget line.
(1 marks)
(ii)
Suppose the income rises from 300 to 360, other things remaining equal. Draw
an additional new budget line to illustrate the change.
(2 marks)
(iii)
Suppose the price of 1 unit of B falls from 5 to 4, other things remaining equal.
Draw an additional new budget line to illustrate the change.
(2 marks)