Econ 3332

 

Summer 2002

 

Homework Answers

 

 

Chapter 1                     3, 5, 8, 16

 

3.                  At University A, people will eat until the benefit from eating an extra pound of food is $0.  At University B, people will eat until the benefit from eating an extra pound of food is $2.  Therefore, everyone will eat less at University B, and this will lower average consumption as well.

 

5.         The band and the rental hall are fixed, therefore you look only at the costs that vary, which is the catering.  $500 / 50 quests = $10 a guest.  10 additional guest will cost 10 * $10 = $100

 

8.                  The plane should only use the state-of-the-art device if Extra Benefits of the device outweigh the Extrra Costs.  You determined that this will happen at a plane size of 200, so therefore only larger planes met this criteria.

 

16.       True.  If you got $15, 000 for the Taurus, and paid that plus $5000 more for the Camry you would have spent $25,000 on the Camry, which you weren’t willing to do in the first place, so you shouldn’t do it now.

           

 
 
Chapter 2                     1, 6, 14

 

            1.        

 

 

 

 

 

 

 

 

 

 

 

            Buyers pay $4 / oz, sellers pay $2 / oz

 


            6.        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a)                  at a price of $35, and $14, there will be 7 DVD’s traded.  At the $35 dollor price, the sellers are dissatisfied, and at $14, the buyers are dissatisfied.

 

b)                  the supply and demand curves intersect at P = $28, Q = 14

 

c)                  Total Revenue = P* Q = 392

 
 
 


14.      

 

 

 

 

 

 

 

 

 

 

 

 

 

           

 

 

Chapter 3                     4, 14, 17, 21

 

4.                  True…each price increased by 15%, so –Px / Py will be unchanged.

 
 
14.      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b)                  If plays cost $12 and movies cost $4, the budget line is B0, which has exactly the same slope as Paula’s indifference curves.  She will be indifferent to all of these bundles

 

c)                  On B1 will consume 10 plays

 

           

 

!7.        If the University would have spent more than 2 million dollars on secular activities anyway, then the restriction will have no effect.

 

 

21.       False, he does not have diminishing MRS. To solve this, plot the points before you draw indifference curves.

 

 

 

 

Chapter 4                     4, 7, 13

 

 

4.        

 

 

 

 

 

 

 

 

 

 

 

 

Solve for the demand curve Q, and multiply the result by 10, then solve in terms of p to get Q = 101  - P for the market demand.  Each person consumes 10 cups, and the market consumes 100 cups.

 

            7          a)         P = $2, Q = 8000, TR = $16,000

 

b)                  P / Q * ) ( 1/ slope) = 2 / 8000 * (-1000) = -0.25

 

c)                  A price increase will increase revenue, since the current price is in the inelastic region.

 

d)                  Demand for bridge will become more elastic, since substitution possibilities increase.     

 

 

13        a)         300 – 1800 – 15P, P =100, TR = ( 100 ) * ( 300 ) = 30,000 cents / day

 

b)                  P = 120 – Q / 15 Price elasticity = 1 / 3 ( -15) = -5

 

c)                  reduction in price will increase total revenue, since demand is elastic.

 

d)                  Maximum total revenue occurs where Price elasticity = -1

P /. Q ( 1 / slope ) = ( P/ Q) ( -15 ) = -1, so maximum total revenue will occur where P = Q / 15

 

Q = 900, P = 60

 

 

Chapter 5                     6, 12, 15

 

            6.        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


            This year, Jones can afford a bundle that he prefers to last year’s

 

            12.      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


a)      The highest attainable indifference curve passes through the point 100, 100

b)      The optimal bundle is to now consume everything in the future.

 

 

15.       True

           

           

Chapter 6                     1, 8, 12

 

1.                  If the general threshold for denying admission is 80, and if those who deny admission are uniformly distributed between 80 and 100, then the best estimate of the messiness index of someone who denies admission is 90.  The threshold will not be stable.  Someone whose messiness index is between 80 and 90 has a good reason to let people in rather than be assumed to have an index of 90.  A threshold of 90 is unstable for similar reasons, as will any disclosure threshold less than 100.

 

  1. EV = 1/6 (1+2+3+4+5+6) = 21/6 = 3.5

 

12. EU (with ticket) = .25 ( 110 )2 + 0.75 ( 100 )2 = 10, 525.  The wealth level to give the same utlity is w = 10525 ½  = 102.59.  So you would be willing to sell the ticket for 2.59.