Question 3 Mrs. Rochester earns $4500 a week and spends her entire income on computers and pastries, since these are the only two items that provide her utility. Furthermore, Mrs. Rochester insists that for every computer she buys, she must also buy a pastry. a) What is the algebraic equation for Mrs. Rochester's budget constraint if computers cost $25 each and pastries cost $14 each? How many of each good will she buy and represent this on a budget line with pastries on the horizontal axis. b) Draw an indifference curve showing the optimum choice. Label the optimum as point A. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. [ c) Suppose the price of pastries increases to $20 and income decreases to $3200. What is the new algebraic equation for Mrs. Rochester's budget constraint? Show the impact of the new budget line relative to the original budget line.
Question 3 Mrs. Rochester earns $4500 a week and spends her entire income on computers and pastries, since these are the only two items that provide her utility. Furthermore, Mrs. Rochester insists that for every computer she buys, she must also buy a pastry. a) What is the algebraic equation for Mrs. Rochester's budget constraint if computers cost $25 each and pastries cost $14 each? How many of each good will she buy and represent this on a budget line with pastries on the horizontal axis. b) Draw an indifference curve showing the optimum choice. Label the optimum as point A. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. [ c) Suppose the price of pastries increases to $20 and income decreases to $3200. What is the new algebraic equation for Mrs. Rochester's budget constraint? Show the impact of the new budget line relative to the original budget line.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 3
Mrs. Rochester earns $4500 a week and spends her entire income on computers and
pastries, since these are the only two items that provide her utility. Furthermore, Mrs.
Rochester insists that for every computer she buys, she must also buy a pastry.
a) What is the algebraic equation for Mrs. Rochester's budget constraint if computers
cost $25 each and pastries cost $14 each? How many of each good will she buy and
represent this on a budget line with pastries on the horizontal axis.
b) Draw an indifference curve showing the optimum choice. Label the optimum as
point A. What would be the marginal rate of substitution at the point that
corresponds to the optimal consumption choice? Interpret the marginal rate of
substitution. [
Suppose the price of pastries increases to $20 and income decreases to $3200. What
is the new algebraic equation for Mrs. Rochester's budget constraint? Show the
impact of the new budget line relative to the original budget line.
d) What would be the new marginal rate of substitution that corresponds to the
optimal consumption choice? Interpret the marginal rate of substitution.
e) Assume for this question only that when the price of computers decreases, less of
that good is demanded. Illustrate the income and substitution effect of this price
decrease.
Question 4
1
2
3
4
5
6
a. Complete the table below
Quantity TC
200
660
Quantity 1
(Units of
output)
Firm A
(TC)
Firm B
60
11
(TC)
Firm C 21
(TC)
TVC
2
100
240
b. Using the table below indicate if the firm has (i) diseconomies of scale (ii)
economies of scale or (iii) constant returns to scale over the entire range of
output. Explain your answer
70
24
34
3
80
39
AFC
49
24
4
90
56
ATC
66
5
100
75
MC
85
20
160
6
110
96
AVC
106
7
120
119
129
c. Evaluate the view that the main goal of firms will always be cost minimization.
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