Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 21, Problem 10PA
To determine
The indifference curve between work and leisure.
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Consider an indifference curve for someone deciding how to allocate time between work (and thus consumption) and leisure. Suppose the wage increases.
The substitution effect induces a person to work and consume
(more , less) ?
in response to higher wages. If consumption is a normal good, the income effect induces the person to consume ( more, less) ?
when the wage rises, but if consumption is an inferior good, the income effect induces the person to consume ( more , less) ?
in response to higher wages.
True or False: The person's consumption may fall as a result of the higher wage if consumption is an inferior good.
True
or
False
Mary spends all her budget on statistical software (S) and office supplies(O). Her preferences can be represented by the utility function: U(S, O) =2 ln(S) + 3 ln(O).
Compute the marginal rate of substitution of software for office supplies. Is the MRS increasing or decreasing in S? How do we interpretthis?
If consumers buy less of a commodity when their incomes rise, this commodity is ( an inferior good , or a normal good ) ? .
When the price of this commodity rises, the substitution effect is
( negative or postive) and the income effect is ( negative or postive) ? .
So the net result for consumption of this commodity ( depends on which effect dominates , is an increase , is a decrease) ? .
Chapter 21 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
Ch. 21.1 - Prob. 1QQCh. 21.2 - Prob. 2QQCh. 21.3 - Prob. 3QQCh. 21.4 - Prob. 4QQCh. 21 - Prob. 1QRCh. 21 - Prob. 2QRCh. 21 - Prob. 3QRCh. 21 - Prob. 4QRCh. 21 - Prob. 5QRCh. 21 - Prob. 6QR
Ch. 21 - Prob. 7QRCh. 21 - Prob. 1QCMCCh. 21 - Prob. 2QCMCCh. 21 - Prob. 3QCMCCh. 21 - Prob. 4QCMCCh. 21 - Prob. 5QCMCCh. 21 - Prob. 6QCMCCh. 21 - Prob. 1PACh. 21 - Prob. 2PACh. 21 - Prob. 3PACh. 21 - Prob. 4PACh. 21 - Prob. 5PACh. 21 - Prob. 6PACh. 21 - Prob. 7PACh. 21 - Prob. 8PACh. 21 - Prob. 9PACh. 21 - Prob. 10PACh. 21 - Prob. 11PACh. 21 - Prob. 12PACh. 21 - Prob. 13PA
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- 3arrow_forwardGabriel has a weekly income (N) of $50, which he uses to purchase cupcakes (C) and tea (7). The price of a cupcake is $1, and the price of tea is $2.50. Suppose Gabriel's income increases to $100, and the prices of both cupcakes and tea remain unchanged. Given this income change, one would expect Gabriel's budget line to: O shift to the right. shift to the left. rotate around the tea axis point. not be affected.arrow_forwardTom has the following utility function: U = FC2 where F is food and C is clothing. Show that Tom’s Marginal Rate of Substitution is given by the expression, MRS = C/2F Does Tom’s Marginal Rate of Substitution stay constant as he moves down along one of his indifference curves? Explain your answer clearly. Suppose the price of food is €1 per unit and the price of clothing is €3 per unit and that Tom’s income is €36. Calculate the number of units of food and clothing that Tom consumes. Partial units are possible.arrow_forward
- Mrs. Griffiths earns $5000 a week and spend her entire income on dresses and handbags. Since these are the only two items that provide her utility. Furthermore, Mrs. Griffiths insists that for every dress she buys, she must also buy a handbag. i. Draw an indifference curve showing the optimum choice. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution.arrow_forwardCho lives in Miami and loves to eat desserts. She spends her entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.50, and a piece of pumpkin pie is priced at $4.50. At her current consumption point, Cho's marginal rate of substitution (MRS) of pudding for pie is 5. This means that Cho is willing to trade five bowls of pudding per week for one piece of pie per week.arrow_forwardMrs. Rochester earns $4500 a week and spends her entire income on computers andpastries, since these are the only two items that provide her utility. Furthermore, a) Draw an indifference curve showing the optimum choice. Label the optimum aspoint A. What would be the marginal rate of substitution at the point thatcorresponds to the optimal consumption choice? Interpret the marginal rate ofsubstitution. b) What would be the new marginal rate of substitution that corresponds to theoptimal consumption choice? Interpret the marginal rate of substitution. c) Assume for this question only that when the price of computers decreases, less ofthat good is demanded. Illustrate the income and substitution effect of this pricedecrease.arrow_forward
- Consider an individual who decides to allocate time between different activities. For simplicity suppose that there are two activities: working and leisure. Denote by tw the time spent for working and to the time spent for leisure and suppose that individual gains utility denoted by U(tw, t). Consider that the individual has 16 hours a day in total that can be spent for working and/or leisure. a) Discuss possible preferences the individual might have and graphically illustrate some examples of indifference curves associated to these preferences. b) Graphically illustrate the time constraint the individual faces. c) Graphically illustrate the optimal time allocation of the individual. Explain why it is optimal by comparing to a sub-optimal allocation choice. d) Write the optimization problem of the individual (formally, as we wrote in lectures). e) Analytically solve the problem, obtain the necessary condition, and provide an interpretation of it (explain in your own words what it…arrow_forwardBob lives in San Diego and loves to eat desserts. He spends his entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.00, and a piece of apple pie is priced at $4.00. At his current consumption point, Bob's marginal rate of substitution (MRS) of pudding for pie is 4. This means that Bob is willing to trade four bowls of pudding per week for one piece of pie per week. Does Bob's current bundle maximize his utility—in other words, make him as well off as possible? If not, how should he change it to maximize his utility? Bob could increase his utility by buying more pudding and less pie per week. Bob's current bundle maximizes his utility, and he should keep it unchanged. Bob could increase his utility by buying less pudding and more pie per week.arrow_forwardThe Müller family has an income of € 4,000 per month. The family gives their entire income for Food and clothing. A piece of clothing costs € 40 and a shopping basket for groceries costs € 20. a) Draw the optimal consumption point. b) How high is the slope of the budget line and how is it to be interpreted? c) How high is the marginal rate of substitution at the optimal consumption point and what is the marginal rate to interpret the substitution? c) Ms. Müller decides to go back to work. She also earns € 4000 a month. Show it,arrow_forward
- draw a graph of indifference curves and budget line. including explain the meaning of the marginal rate of substitution of products x and y (MRSxy).arrow_forwardTim consumes only apples and bananas. He prefers more apples to fewer, but he gets tired of bananas. If he consumes fewer than 29 bananas per week, he thinks that 1 banana is a perfect substitute for 1 apple. But you would have to pay him 1 apple for each banana beyond 29 that he consumes. The indifference curve that passes through the consumption bundle with 30 apples and 39 bananas also passes through the bundle with A apples and 21 bananas, where A equals 25 28 34 36 None of the above.arrow_forwardDraw the indifference curve for someone decidinghow to allocate time between work and leisure.Suppose the wage increases. Is it possible that theperson’s consumption would fall? Is this plausible?Discuss. (Hint: Think about income and substitutioneffects.)arrow_forward
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