Assignment Microeconomy

4. Andy continues his hobbies which are photography and cycling. His budget for these hobbies are still $5,000. The price of a camera(x) is $625 and a bicycle(y) is $250. But, unfortunately the price of a camera rises to $1,000.

* Calculate the first combination which give him maximum satisfaction

* Calculate the new combination after the price camera falls

* Calculate the substitution effect and income effect on camera purchase.

* Graph the curves in one picture

Given condition: U(x,y) = x.y ; MUx = y ; MUy = x

5.

a. Find all the three demand functions (segments and market)?

b. Illustrate the market demand curves!

6. a. What is network externality?

b. What is the difference between bandwagon effect and snob effect?

Answer

4. Budget constraint: New budget constraint

625x+250y=5000 1000x+250y=5000

* The first combination which give the maximum satisfaction

625x+250y=5000

5x+2y=40

MUxMUy=PxPy

yx=625250

y=52x

5x+252x=40

x=4 ;y=10

So, the combination which gives maximum utility is 4 cameras and 10 bicycles.

* The new combination after the price of the camera falls:

1000x+250y=5000

4x+y=20

MUxMUy=PxPy

yx=1000250

y=4x

4x+4x=20

x=2.5 ;y=10

So, the combination which gives maximum utility is 2.5(~2) cameras and 10 bicycles.

* Substitution effect and income effect

U = x . y

x . y=40

x . 4x=40

x2=10

x= 10

x=3.1623

y=12.649021

Income effect:

2.5 – 3.1623 = -0.6623

Substitutions effect:

3.1623-4=-0.8377

* Curve of Andy’s combination for his maximum utility in two different prices camera

--- 625x+250y=5000

--- 1000x+250y=5000

5. a. Demand curve of health conscious:

P=-2Q+6

Demand curve of chocolate lover:

P=-Q+10

Demand curve of market:

P0≤Q≤4=-Q+10 ;

PQ≥4=-23Q+263

6. a. Network externality is a demand characteristic present when the amount of a good demanded by one customer depends on the number of the other...