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- 8. (Continuing with the situation described in the preceding question.) Consider the economic model of an individual's labor-leisure choice with the following components: good w represents the hourly wage rate Y represents nonlabor income T represents total time available U(C, L) represents the individual's utility function MUC denotes the marginal utility of consumption MUL denotes the marginal utility of leisure Unless otherwise instructed, assume that consumption and leisure are normal goods. Whenever graphing the model, put C on the vertical axis and L on the horizontal axis. 4 C represents units of the consumption good L represents hours of leisure The individual maximizes his utility by choosing the optimal consumption bundle C*=90, L*=15, and H*=9. At this consumption bundle, MUC=4 and MUL=12. If p=2, what is w? 8 H represents hours of paid work p represents the unit price of the consumption O 10 O There is not enough information to determine w.8.(7 points) Suppose Backbeat BBQ, Dave Grohl's one-man catering company, offers two types of membership plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on all other goods and y be the units of consumption of Backbeat BBQ's services, and suppose you have an income of $100. A. Write down the budget equation that you would have after you paid the entry fee for each of the two plans. B. If your utility function is xy, how much y would you choose in each case? C. Which plan would you prefer? Explain.
- 2. (Figure 4.3) Which of the following statements is FALSE? Baskets of tomatoes 10- 7.85 6- 4.89 I 4 1.76 = 0 A B C 4 1.47 3.26 5.05 D 6 8 6.53 • U₂ U₁ 10 Bags of carrots Oa. Bundle C is preferred to bundle D. Ob. Bundle A is preferred to bundle C. Oe. Indifference curve U₂ provides a higher level of utility than indifference curve U₁. Od. The consumer is indifferent between bundle A and bundle D..3) Use the table below to answer the following question. Table 3 Price of Jolt Price of Coke Income Level Jolt Sales $25,000 $25,000 $35,000 $35,000 2014 $1.00/can $1.00/can $1.00/can $1.40/can $1.00/can 15,000 cases 25,000 cases 15,000 cases 5,000 cases 2015 $1.40/can $1.40/can 2016 2017 $1.40/can Refer to Table 3. What is the price elasticity of demand for Jolt? b. Refer to Table 3. What is The Income elasticity of demand for Jolt? What type of good is Jolt when it comes to price elasticity of demand? d. What type of good is Jolt when it comes to income elasticity of demand? What is the cross-Price elasticity between Coke and Jolt? f. Are Coke & Jolt Complements or substitutes? a. C. e. 13°C DELL 91 end fin insert home début prt sc impécr F10 F12 F11 F9 F8 F6 F7 FS2. (All right, this one IS tricky. Use the hints and do the best you can!) Suppose there are 2 brothers - Cain and Abel. Cain has a utility function U(L,R) 2min {L,R}, where L and R are left and right shoes respectively. Abel's utility function for shoes is U(L,R)-3L+3R. Further, suppose Cain's endowment is (4 left, 8 right) while Abel's endowment is (7 left, 2 right). a. b. C. d. e. Carefully construct the Edgeworth Box for this exchange economy being careful to label everything and to indicate the box's dimensions. Label the endowment point as well as the initial indifference curves for both Cain and Abel. Label the Contract Curve. (Hint: they cannot trade ½ a shoe.) What are the possible equilibria in this economy? Describe how those equilibria would occur.
- 6. Tax systems and saving This question addresses the impact of saving on an economy by examining what happens if tax laws change to induce saving and how changes in tax laws can discourage saving. The following graph shows the market for loanable funds. Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or both. INTEREST RATE LOANABLE FUNDS S 6.4. (?)7. (Figure 10.5) Suppose that a firm offers customers either (1) the ability to buy any quantity they desire for $24 per unit or (2) a price of $18 per unit for 15 or more than under the $24-per-unit pricing scheme, so the plan to charge these types of consumers a price of units. Consumer surplus under the quantity discount is $24 per unit is compatible. Price (S) 40 30- 24- 20 18 10- TTTT 6 8 10 12 14 16 18 20 22 Quantity 11 15 O $64 more; incentive O $32 less; not incentive O $53 less; incentive O $41 more; not incentive3. (20%) Elasticity (related to Total Revenue): (Please show your steps & decision rules) The demand schedule for a specific computer software is as follows- Please use the relationship between Elasticity and TR (total revenue) to make judgment. Price (per copy of software) $630 640 Quantity demanded (in million) 64 61 660 59 690 55 750 53 765 50 775 49 820 47 850 45 860 43 a. What type of elasticity (elastic, inelastic, or others) is this demand if the price of this software decreases from $750 to $640? (2%) explain why and show your steps. b. What type of elasticity (elastic, inelastic or others) is this demand if the price of this software increases from $690 to $765? (2%) explain why and show your steps. At what price is total revenue a maximum and what quantity sold? 2% Show your calculation/numbers d. When the price increases from $660 to $775, is the demand for this software elastic or inelastic or others? Explain why. 2% e. When the price decreases from $850 to $765, is the…
- 5. (12 points) For each of the following utility functions, write the general equation for the indifference curve and the general equation for the MRS. Next graph the indifference curve for U= 40 for each of the following utility functions (with x on the horizontal axis). Finally determine whether the indifference curves for each of the utility functions are convex (that is, whether the MRS decreases as x increases). a. U(x, y) = xy b. U(x, y) =x¹/² + y c. U(x, y) = 3x + y4. (b) There are three people and two goods in an economy. The utility functions and initial bundles are given below: U, = x11X12 U2 = 2x21 + x22 U3 = X31X32 + X32 W1 = (0,8) W2 = (2,2) W3 = (8,0) Suppose it is suggested that the three traders move to the allocation x given by: x1 = (1,2), x2 = (8,4), x3 = (1,4). i) Calculate the marginal rate of substitution for the three at the allocation x.4- The increase in the quantity supplied of the good as its price rises is expressed as …………. a) inferior goods B) Value paradox NS) law of supply D) Marginal propensity to import TO) law of demand
