Economics Assignment: Long Run vs Short Run, Elasticity of Demand, Optimal Bundle, Indifference Map, Irrational Behavior

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author’s Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
References........................................................................................................................................6

2ECONOMICS ASSIGNMENT
Answer 1
a) The long run is the time period where all costs and factors of production are variable. The
firms have the ability to adjust costs and respond to the changes in demand. In the long run,
entities can enter or leave the market and manufacturer is flexible in production decision. In fact,
the price elasticity of demand might vary in the long run. On the other hand, short run is the time
period where one factor of production or input is fixed and others are variable (Cooper & John,
2013). This indicates that if an entity wants to enhance output, it might employ several
employees but not enhance capital in short run. In short run, diminishing marginal returns can be
obtained and marginal costs might start to increase. The price elasticity of demand might not
vary in short run.
b) Elasticity of demand relates to the degree of sensitivity of the quantity demanded of products
with respect to change in its own price, prices of other related products and consumers’ income
(Mankiw, 2014). There are three types of elasticity of demand- price elasticity, cross elasticity
and income elasticity. Both the numbers -0.098 and -0.150 reflects inelastic demand for gasoline
in short run and long run. But these numbers indicate that the elasticity of demand for gasoline is
relatively more inelastic in the long run than in the short run.
c) In the short run, demand tends to be more inelastic as consumers have less time to find other
alternatives and might not have the ability to adjust their expenditure pattern. On the other hand,
as consumers become highly aware of alternatives and likely to adjust to price changes, demand
tends to be less inelastic or elastic in the long run.
d) If the price of gasoline increases, total revenue of the seller of gasoline also increases as it
depends on total receipts from sale of specific quantity of products. Moreover, total revenue also
changes as it is also based on price elasticity of goods. This means that if the price elasticity of