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Questions and Answers of Economics

Continental Long Distance Telephone Service offers an optional package for in-state calling whereby each month the subscriber gets the first 50 min of in-state calls free, the next 100 min at
You have the option of renting a car on a daily basis for $40/day or on a weekly basis for $200/wk. draw your budget constraint for a budget of $360/trip.a. Find your best affordable bundle if your
Howard said that he was exactly indifferent between consuming four slices of pizza and one beer versus consuming three slices of pizza and two beers. He also said that he prefers a bundle consisting
Your local telephone company has offered you a choice between the following billing plans: Plan A: Pay $0.05 per call. Plan B: Pay an initial $2/wk, which allows you up to 30 calls per week at no
At your school’s fund- raising picnic, you pay for soft drinks with tickets purchased in advance—one ticket per bottle of soft drink. Tickets are available in sets of three types: Small: $3 for 3
Consider two Italian restaurants located in identical towns 200 miles apart. The restaurants are identical in every respect but their tipping policies. At one, there is a flat $15 service charge, but
Mr. R. Plane, a retired college administrator, consumes only grapes and the composite good Y (PY = $1). His income consists of $10,000/yr from social security, plus the proceeds from whatever he
Smith likes cashews better than almonds and likes almonds better than walnuts. He likes pecans equally well as macadamia nuts and prefers macadamia nuts to almonds. Assuming his preferences are
For the Continental Long Distance subscriber in Problem 18, what is the opportunity cost of making an additional 20 min of calls if he currently makesa. 40 min of calls each month? b. 140 min of
Tom spends all his $100 weekly income on two goods, X and Y. His utility function is given by U(X, Y) = XY. If PX = 4 and PY = 10, how much of each good should he buy?
Same as Problem 1, except now Tom’s utility function is given by U(X, Y) = X1/2Y1/2.
Sue consumes only two goods, food and clothing. The marginal utility of the last dollar she spends on food is 12, and the marginal utility of the last dollar she spends on clothing is 9. The price of
Note the relationship between your answers in Problems 1 and 2. What accounts for this relationship?
Albert has a weekly allowance of $17, all of which he spends on used CDs (C) and movie rentals (M), whose respective prices are $4 and $3. His utility from these purchases is given by U(C) + V(M). If
Summarize the relationship between price elasticity, changes in price, and changes in total expenditure.
Why don’t we measure the responsiveness of demand to price changes by the slope of the demand curve instead of using the more complicated expression for elasticity?
How can changes in the distribution of income across consumers affect the market demand for a product?
Mike spends all his income on tennis balls and basketball tickets. His demand curve for tennis balls is elastic. True or false: If the price of tennis balls rises, he consumes more tickets. Explain.
Suppose your budget is spent entirely on two goods: bread and butter. If bread is an inferior good, can butter be inferior as well?
True or false: For a budget spent entirely on two goods, an increase in the price of one will necessarily decrease the consumption of both, unless at least one of the goods is inferior. Explain.
Sam spends $6/ wk on orange juice and apple juice. Orange juice costs $2/cup while apple juice costs $1/cup. Sam views 1 cup of orange juice as a perfect substitute for 3 cups of apple juice. Find
Bruce has the same income and faces the same prices as Sam in Problem 1, but he views 1 cup of orange juice as a perfect substitute for 1 cup of apple juice. Find Bruce’s optimal consumption
Maureen has the same income and faces the same prices as Sam and Bruce, but Maureen views 1 cup of orange juice and 1 cup of apple juice as perfect complements. Find Maureen’s optimal consumption
The market for lemonade has 10 potential consumers, each having an individual demand curve P = 101 - 10Qi, where P is price in dollars per cup and Qi is the number of cups demanded per week by the
a. For the demand curve P = 60 - 0.5Q, find the elasticity at P = 10.b. If the demand curve shifts parallel to the right, what happens to the elasticity at P = 10?
Consider the demand curve Q = 100 - 50P. a. Draw the demand curve and indicate which portion of the curve is elastic, which portion is inelastic, and which portion is unit elastic. b. Without doing
Suppose the demand for crossing the Golden Gate Bridge is given by Q = 10,000 - 1000P.a. If the toll (P) is $3, how much revenue is collected? b. What is the price elasticity of demand at this point?
Professors Adams and Brown make up the entire demand side of the market for summer research assistants in the economics department. If Adams’s demand curve is P = 50 - 2QA and Brown’s is P = 50 -
Suppose that at a price of $400, 300 tickets are demanded to fly from Ithaca, New York, to Los Angeles, California. Now the price rises to $600, and 280 tickets are demanded. Assuming the demand for
The monthly market demand curve for calculators among engineering students is given by P = 100 - Q, where P is the price per calculator in dollars and Q is the number of calculators purchased per
A hot dog vendor faces a daily demand curve of Q = 1800 - 15P, where P is the price of a hot dog in cents and Q is the number of hot dogs purchased each day.a. If the vendor has been selling 300 hot
Rank the absolute values of the price elasticities of demand at the points A, B, C, D, and E on the following three demandcurves.
Draw the Engel curves for the following goods: food, Hawaiian vacations, cashews, and Kmart brand sneakers ($4.99/pr).
In 2001, X cost $3 and sold 400 units. That same year, a related good Y cost $10 and sold 200 units. In 2002, X still cost $3 but sold only 300 units, while Y rose in price to $12 and sold only 150
Smith cannot tell the difference between rice and wheat and spends all her food budget of $24/wk on these foodstuffs. If rice costs $3/lb, draw Smith’s price-consumption curve for wheat and the
Repeat the preceding problem on the assumption that rice and wheat are perfect, one-for-one complements.
Suppose your local espresso bar makes the following offer: People who supply their own half- pint carton of milk get to buy a cup of cappuccino for only $1.50 instead of $2.50. Half- pint cartons of
Consumer expenditures on safety are thought to have positive income elasticity. For example, as incomes rise, people tend to buy safer cars (larger cars with side air bags), they are more likely to
What price maximizes total expenditure along the demand curve P = 27 - Q2?
Explain in your own words why a gasoline tax whose proceeds are refunded to the consumer in a lump- sum amount will nonetheless reduce the consumption of gasoline.
Explain in your own words what a two-part pricing scheme is and why sellers might use one.
Explain why 1 plus the interest rate in the inter-temporal choice model is analogous to the relative price ratio in the consumer choice model discussed in Chapter 3.
Jennifer, who earns an annual salary of $20,000, wins $25,000 in the lottery. Explain why she most likely will not spend all her winnings during the next year.
Bus services are generally more energy efficient than cars yet the trend over the past 30 years has been a decline in the proportion of commuters taking buses despite an increase in real energy
Using a diagram like Figure 5.2, explain why, under our current method of educational finance, a rich family is much more likely than a poor family to send its children to a private school.
When the price of gasoline is $1/gal, you consume 1000 gal/ yr. Then two things happen: (1) The price of gasoline rises to $2/gal and (2) a distant uncle dies, with the instruction to his executor to
Larry demands strawberries according to the schedule P = 40 - (Q/2), where P is the price of strawberries ($/pint) and Q is the quantity (pint/ wk). Assuming that the income effect is negligible, how
The only DVD rental club available to you charges $4 per movie per day. If your demand curve for movie rentals is given by P = 20 - 2Q, where P is the rental price ($/day) and Q is the quantity
Jones spends all his income on two goods, X and Y. The prices he paid and the quantities he consumed last year are as follows: PX = 15, X = 20, PY = 25 and Y = 30. If the prices next year are PX = 6
Suppose Smith from Problem 7 views current and future consumption as perfect, one-for-one substitutes for one another. Find his optimal consumption bundle.
Suppose Smith from Problem 7 views current and future consumption as one-to- one complements. Find his optimal consumption bundle.
Karen earns $75,000 in the current period and will earn $75,000 in the future period.a. Assuming that these are the only two periods, and that banks in her country borrow and lend at an interest rate
Find the present value of $50,000 to be received after 1 year if the annual rate of interest isa. 8 percent b. 10 percent c. 12 percent
Crusoe will live this period and the next period as the lone inhabitant of his island. His only income is a crop of 100 coconuts that he harvests at the beginning of each period. Coconuts not
Kathy earns $55,000 in the current period and will earn $60,000 in the future period. What is the maximum interest rate that would allow her to spend $105,000 in the current period? What is the
Smith receives $100 of income this period and $100 next period. At an interest rate of 10 percent, he consumes all his current income in each period. He has a diminishing marginal rate of time
At current prices, housing costs $50 per unit and the composite good has a price of 1 per unit. A wealthy benefactor has given Joe, a penniless person, 1 unit of housing and 50 units of the composite
Tom and Karen are economists. In an attempt to limit their son Harry’s use of the family car, they charge him a user fee of 20 cents/ mile. At that price he still uses the car more than they would
All book buyers have the same preferences, and under current arrangements, those who buy used books at $22 receive the same utility as those who buy new books at $50. The annual interest rate is 10
Herb wants to work exactly 12hr/wk to supplement his graduate fellow-ship. He can either work as a clerk in the library at $6/hr or tutor first- year graduate students in economics. Pay differences
Harry runs a small movie theater, whose customers all have identical tastes. Each customer’s reservation price for the movie is $5, and each customer’s demand curve for popcorn at his concession
Jane spent all her income on hot dogs and caviar. Her demand curve for caviar was inelastic at all prices for caviar. Unfortunately, an accident at a nuclear power plant caused the supply of caviar
Smith lives in a world with two time periods. His income in each period, which he receives at the beginning of each period, is $210. If the interest rate, ex-pressed as a fraction, is 0.05 per time
How will your answer to the preceding problem differ if the tuition charged by outside universities is $12,000/yr? What is the economic interpretation of a value of k greater than 1?
Cornell is committed to its current policy of allowing the children of its faculty to attend the university without paying tuition. Suppose the demand curve of Cornell faculty children (CFCs) for
What practical difficulty confronts laws that try to regulate what questions can be asked of job applicants during employment interviews?
How does statistical discrimination affect the aver-age insurance premium paid by members of different groups?
Suppose the messiness of apartments is measured on a scale from 0 to 100, with 0 the cleanest and 100 the messiest. Suppose also that the distribution of apartments by messiness is as shown in the
Explain in detail what will happen to an insurance company that charges teen-age males the same rates for automobile insurance as it charges its other customers.
It is known that some fraction d of all new cars is defective. Defective cars can-not be identified as such except by the people who own them. Each consumer is risk neutral and values a non-defective
A new motorcycle sells for $9000, while a used motorcycle sells for $1000. If there is no depreciation and risk- neutral consumers know that 20 percent of all new motorcycles are defective, how much
What grounds are there for assuming that a randomly chosen social worker is less likely to cheat you in cards than a randomly chosen person?
At the turn of this century, most banks required tellers to have a high school diploma. Even though the tasks currently performed by tellers in most banks can still be performed by persons who have
Suppose you have $10,000 to invest. A broker phones you with some information you requested on certain junk bonds. If the company issuing the bonds posts a profit this year, it will pay you a 40
A farmer’s hens lay 1000 eggs/ day, which he sells for 10 cents each, his sole source of income. His utility function is U = √M, where M is his daily income. Each time a farmer carries eggs in
Your current wealth level is M = 49 and you are forced to make the following wager: If a fair coin comes up heads, you get 15; you lose 13 if it comes up tails. Your utility function is U = √M.a.
Smith has an investment opportunity that pays 33 with probability 1/2 and loses 30 with probability 1/2. a. If his current wealth is M = 111, and his utility function is U = √M, will he make this
John has a von Neumann–Morgenstern utility function given by U = √M, where M is his income. If he becomes an economics professor, he will make M = 81/ yr with probability 1. If he becomes an
In the preceding problem, assuming that the interview is costless for Smith to conduct, is he getting the highest possible expected income for himself by charging John the same fee regardless of the
There are two groups of equal size, each with a utility function given by U(M) = √M, where M = 100 is the initial wealth level for every individual. Each member of group 1 faces a loss of 36 with
There are two groups, each with a utility function given by U(M) = √M, where M = 144 is the initial wealth level for every individual. Each member of faces a loss of 44 with probability 0.5. Each
Given a choice between A (a sure win of 100) and B (an 80 percent chance to win 150 and a 20 percent chance to win 0), Smith picks A. But when he is given a choice between C ( a 50 percent chance to
The exhaust system on your 1986 Escort needs to be replaced, and you suspect that the price of a new exhaust system is the same as what you would get if you tried to sell the car. If you know that
A fair coin is flipped twice and the following payoffs are assigned to each of the four possible outcomes: H - H: win 20; H - T: win 9; T - H: lose 7; T - T: lose 16. What is the expected value of
Suppose your utility function is given by U = 1M, where M is your total wealth. If M has an initial value of 16, will you accept the gamble in the preceding problem?
Suppose your current wealth, M, is 100 and your utility function is U = M2. You have a lottery ticket that pays $10 with a probability of 0.25 and $0 with a probability of 0.75. What is the minimum
Your utility function is √M. Your current wealth is $400,000. There is a 0.00001 probability that your legal liability in an automobile accident will reduce your wealth to $0. What is the most you
You are searching for a high wage from a wage distribution that is uniform on the interval (5, 8). The cost of each search is 0.06. What is the smallest wage you should accept?
Suppose you are the economic advisor for a firm that is trying to decide whether to acquire Bumbler Oil Company, whose only asset is an oil field that has a net value X under its current management.
If the wages you are offered are uniformly distributed between $75 and $150, and if the cost of looking for another job is $2, what is the minimum wage you should accept?
Earthly Bliss dating service charges $100 per date that it arranges. All of its dates will accept an offer of marriage. In your estimation the quality of the potential spouses offered by the dating
A class of 100 students is participating in an auction to see who gets a large jar of quarters. Each student has an unbiased estimate of the total value of the coins. If these estimates are drawn
You are a buyer for a used- car dealer. You attend car auctions and bid on cars that will be sold at the dealer. The cars are sold “as is” and there is seldom an opportunity to make a thorough
Alphonse’s utility function is given by UA = MA MG,Where M A and M G are the wealth levels of Alphonse and Gaston, respectively. If Alphonse’s initial wealth level is 100 while Gaston’s is only
Abdul’s utility function is given by UA = MA2/MBWhere MA is Abdul’s wealth level and MB is Benjamin’s wealth level. Benjamin’s utility function is given by UB = MB2/MASuppose MA = MB = 10
Now, suppose Benjamin’s utility function is given by UB = MB2 in Problem 2. And suppose Abdul signs a contract saying that he will donate 20 to a cause he opposes in the event that he receives less
Harold’s utility is given by U = 3M + 60V, where M is the dollar value of his annual consumption of the composite good and V takes the value 1 if he votes and 0 if he does not. Harold finances his
Suppose your happiness is given by a Kahneman-Tversky value function like the one shown in the diagram.You have decided to put the most favorable spin on the various combinations of events that occur
Sears, Roebuck and Co. has hired you as a consultant to give it marketing ad-vice about how to sell its new all-terrain vehicle. On the basis of the material covered in this chapter, suggest two
Give two examples of how the framing of alternatives tends to produce systematic effects on people’s choices.

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