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 a1 What is the equilibrium price of apples? How many pounds of apples does each villager consume? Part a2 What is the aggregate net consumer surplus at the equilibrium? Part a3 What is the price elasticity of demand at the equilibrium? 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.
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 a1
What is the
villager consume?
Part a2
What is the aggregate net
Part a3
What is the price
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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