Question Two
[25 marks]
a) The demand for beer in Japan is given by the following equation: Qd= 700 - 2P - PN+ 0.11,
where P is the price of beer, PNis the price of nuts, and I is average consumer income.
i. What happens to the demand for beer when the price of nuts goes up? Are beer and
nuts demand substitutes or demand complements?
[6 marks]
ii. What happens to the demand for beer when average consumer income rises?
u1. Graph the demand curve for beer when PN= 100 and I= 10,000.
[2 marks]
[2 marks]
b) Suppose that demand for bagels in the local store is given by equation Q d = 300 - IO0P. In
this equation, P denotes the price of one bagel in dollars.
i. Fill in the following table
[10 marks]
Price
0.10
0.45
0.50
0.55
2.50
Quantity
demanded
Price
elasticity of
demand
11. Plot this demand curve in a graph. Is it linear?
iii. At what price is demand unitary elastic?
iv. At what price is demand inelastic?
v. At what price is demand elastic?
[2 marks]
[1 mark]
[1 mark]
[1 mark]
Question Three
[25 marks]
The utility that Ann receives by consuming food F and clothing C is given by U(F, C) = FC +
F. Food costs N$1 a unit, and clothing costs N$2 a unit. Ann's income is N$22.
a) Ann is currently spending all of her income. She is buying 8 units of food. How many units
of clothing is she consuming?
[3 marks]
b) Graph her budget line. Place the number of units of clothing on the vertical axis and the
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