Economics for Managers (ECO 511) - Homework 2: Demand and Elasticity

This economics assignment, designed for a "Economics for Managers" course, analyzes the concept of demand elasticity using gasoline as a case study. It explores the differences between short-run and long-run demand, explaining how elasticity impacts seller revenue. The assignment also delves into consumer behavior, examining budget lines, indifference curves, and cognitive biases. The student provides graphical representations of the budget line and indifference map, illustrating consumer preferences and constraints. Finally, the assignment discusses a scenario involving cognitive bias in decision-making. The solution demonstrates a comprehensive understanding of microeconomic principles, including supply and demand, consumer choice, and behavioral economics.

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ECONOMICS FOR MANAGERS

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Table of contents
Exercise 1.........................................................................................................................................3
Exercise 2.........................................................................................................................................5
Exercise 3.........................................................................................................................................5
Exercise 4.........................................................................................................................................6
Reference.........................................................................................................................................7

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Exercise 1
(a)
Short run and the long run denotes the time period in economics. Flexibility is the differentiating
factor between the short run and the long run. While in the short run the inputs to the production
process cannot be changed, in the long run, the inputs can be changed. From the perspective of
the customers also, in the short run the amount of output and choices of the product is limited
(Cowell, 2018). However, there is no fixed time period that can be considered as the short run or
long run. For example, a baby crying for 7 hours continuously can be considered as a long run,
while two years of operation of a company can be considered as a short run.
(b)
Elasticity is the responsiveness of the quantity demanded with respect to the change in other
variables such as own price, the price of a substitute, the price of complementary goods and the
income of the consumer. The price elasticity of demand is basically the percentage change in the
quantity demanded divided by percentage change in the price of that product. Here these two
numbers denote the price elasticity of demand for gasoline in the short run and long run. The
minus sign before the figure denotes the negative relationship between the price and the quantity
demanded of gasoline. Depending on the absolute value of elasticity the demand is either elastic
or inelastic (Mankiw, 2016).
The price elasticity of demand is generally denoted by ep. When the absolute value of the ep is
more than 1, the percentage change in the quantity is more than the percentage change in the
price. On the other hand, when the absolute value of the ep is less than 1, the percentage change
in quantity demanded is less than the percentage change in the price of the product.
|e|>1 => elastic demand
|e|<1 => inelastic demand (e denotes the price elasticity)
(c)

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In the short run, inputs to the production are fixed and the output is not flexible. Therefore the
output is flexible and the consumer has no other choice to move their consumption in the short
run corresponding to a rising gasoline price. On the other hand, in the long run, inputs are
changeable and hence the output is changeable too (Bauer, 2018). That allows the consumer to
have more buying option and hence the demand reduces more in the long run corresponding to
increase in price.
(d)
The revenue of the seller is,
Quantity sold* price of gasoline
Now in the short run, the demand is inelastic. That means a proportionate increase in price is
more than the reduction in quantity demanded (Ogloblin et al. 2018).
Thus, Revenue ↑↑= Quantity sold ↓* price of gasoline ↑↑
On the other hand, in the long run, the demand for gasoline is elastic. That means the
proportionate reduction in demand is more than the increase in prices.
Thus, Revenue ↓↓= Quantity sold ↓↓* price of gasoline ↑
Therefore the revenue of the seller increases in the short run and decreases in the long run with
the increase in the price of gasoline.

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Exercise 2
Figure 1: change in the budget line
(Source: Developed by the learner)
One of the explanations for the change in the optimum bundle can be the change in the budget
line. The new budget line has pivoted to show that the price of Y has increased and the price of
X has decreased (Kolmar, 2017). The intercept in the y-axis has reduced as with higher prices,
less number of Y can be bought with all the budget. Similarly, due to the reduction in the price of
X, the intercept has increased in X-axis. With the new budget constraints, Adam has the option
to move towards a higher utility.
Exercise 3
(a) Two important good that I buy is bread and movie tickets.

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Figure 2: The indifference map
(Source: Developed by the learner)
The indifference map is derived through the revealed preference of mine. The budget constraint
is steep because of the fact that, the price of movie tickets is more than the price of bread.
Exercise 4
In this case, the student exhibits a cognitive bias and emotion. In this case, the student has spent
a lot of money on the tuition only because he loved the MBA classes. The rationality of the
buyer is subject to cognitive bias, emotions and social influence (Nguyen and Wait, 2015). A
rational buyer, in this case, will have no influence from the emotions and social factors. The
student is bound to continue the MBA classes under behavioral economics and under the
condition that he is rational if he has already spent a lot on the tuition fees.

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Reference
Kolmar, M., 2017. Principles of Microeconomics. Springer International Publishing.
Bauer, M.J.R., 2018. Principles of microeconomics. Routledge.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Mankiw, N.G., 2016. Economics-Microeconomics-Principles of Microeconomics. Worth
publishing Ltd.
Nguyen, B. and Wait, A., 2015. Essentials of Microeconomics. Routledge.
Ogloblin, C., Brown, J., King, J. and Levernier, W., 2018. Principles of Microeconomics (GA
Southern). Galileo Publishers.