II. PROBLEM SOLVING: Solve the following problems. Show complete solution(formula -

substitution - answer). Round off answers to 4 decimals. Interpret your answer.

1. R and B Railroad decided to reduce their fares to see if it would help their business. They

reduced their ticket prices by 25 per cent on average and their sales increased from $325,000

per month to $332,000 on average.

a. Calculate the corresponding elasticity. Interpret your answer. (5 points)

2. A 2 percent increase in the price of milk causes a 4 percent reduction in the quantity

demanded of chocolate syrup.

a. Calculate the corresponding elasticity. Interpret your answer. (5 points)

3. If a 10 percent increase in income causes the number of students who 2 points

choose to attend private universities to go up by 5 percent, what is the income elasticity of

demand for private universities? Interpret your answer. (5 points)

4. Diagram the following budget constraints: (5 points)

a. Income = $4000, Px = $50, Py = $100

b. Income = $3000, Px = $25, Py = $200

5. How much of each good must be consumed to maximize the budget? What is the combined

total utility? (Part of your answer should be presented in a table). (20 points)

Given: Price of Good A = $2, Price of Good B = $1, Income = $9

Units of

Good A

TU of

Good A

MU of

Good A

MU/$ Units of

Good B

TU of

Good B

MU of

Good B

MU/$

1 10 1 8

2 18 2 15

3 24 3 21

4 28 4 26

5 31 5 30

6 33 6 33