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intermediate microeconomics

Microeconomics 7th Edition Jeffrey M. Perloff - Solutions

5.10 Today most developed countries have progressive income taxes where rich people pay a higher marginal tax rate than poor people. Under such a taxation program, is the marginal tax higher than, equal to, or lower than the average tax?
5.9 Taxes during the fourteenth century were very progressive.The 1377 poll tax on the Duke of Lancaster was 520 times the tax on a peasant. A poll tax is a lump-sum (fixed amount) tax per person, which does not vary with the number of hours a person works or how much that person earns. Use a graph
5.8 Joe won $365,000 a year for life in the state lottery.Use a labor-leisure choice analysis to answer the following questions:a. Show how Joe’s lottery winnings affect the position of his budget line.b. After winning the lottery, Joe continues to work the same number of hours each day (see the
5.7 Suppose that Bill’s wage varies with the hours he works: w(H) = αH, α 7 0. Show how the number of hours he chooses to work depends on his tastes.
5.6 Suppose that the job in Question 5.5 that had no restriction on hours was the higher-paying job.How do Jerome’s budget constraint and behavior change? (Hint: See Solved Problem 5.6.)
5.5 Jerome moonlights: He holds down two jobs.The higher-paying job pays w, but he can work at most eight hours. The other job pays w*, but he can work as many hours as he wants. Show how Jerome determines how many hours to work.(Hint: See Solved Problem 5.6.)
5.4 Suppose that Roy could choose how many hours to work at a wage of w and chose to work seven hours a day. The employer now offers him timeand-a-half wages (1.5w) for every hour he works beyond a minimum of eight hours per day. Show how his budget constraint changes. Will he choose to work more
5.3 Bessie, who can currently work as many hours as she wants at a wage of w, chooses to work ten hours a day. Her boss decides to limit the number of hours that she can work to eight hours per day. Show how her budget constraint and choice of hours change. Is she unambiguously worse off as a
5.2 If an individual’s labor supply curve slopes upward at low wages and bends backward at high wages, is leisure a Giffen good? If so, at high or low wage rates? (Hint: See Solved Problems 5.5 and 5.6.)
5.1 Using calculus, show the effect of a change in the wage on the amount of leisure an individual wants to consume. (Hint: See Appendix 5B.) C
4.5 Change Figure 5.5 so that L2 is steeper than L1(but still goes through e1); that is, food increases by more than clothing in the second year. Show the conclusion that Klaas is still better off after receiving a CPI adjustment. Explain the logic behind the following statement: “The analysis
4.4 Alix views coffee and cream as perfect complements.In the first period, Alix picks an optimal bundle of coffee and cream, e1. In the second period, inflation occurs, the prices of coffee and cream change by different amounts, and Alix receives a cost-of-living adjustment (COLA) based on the
4.3 Ann’s only income is her annual college scholarship, which she spends exclusively on gallons of ice cream and books. Last year when ice cream cost $10 and used books cost $20, Ann spent her $250 scholarship on five gallons of ice cream and ten books. This year, the price of ice cream rose
4.2 During his first year at school, Ximing buys eight new college textbooks at a cost of $50 each.Used books cost $30 each. When the bookstore announces a 20% price increase in new texts and a 10% increase in used texts for the next year, Ximing’s father offers him $80 extra. Is Ximing better
4.1 The Economist magazine publishes the Big Mac Index for various countries, based on the price of a Big Mac at McDonald’s over time. Under what circumstances would people find this index to be as useful as or more useful than the Consumer Price Index in measuring how their true cost of living
3.9 Redraw Figure 5.4 using an equivalent variation rather than a compensating variation approach.
3.8 Remy views ice cream and fudge sauce as perfect complements. Is it possible that either of these goods or both of them are Giffen goods? (Hint:See Solved Problem 5.5.)
3.7 Draw a figure to illustrate the answer given in Solved Problem 5.4. Use math and a figure to show how adding an ad valorem tax changes the analysis.(See the Application “Shipping the Good Stuff Away.”)
3.6 Relatively more high-quality navel oranges are sold in California than in New York. Why? (Hint: See Solved Problem 5.4.)
3.5 Using a figure similar to Figure 5.4 or that in Solved Problem 5.3, discuss the substitution, income, and total effects of a price change for Coke for Mahdu who views Coke and Pepsi as perfect substitutes.(Hint: See Solved Problem 5.1.)
3.4 Under what conditions does the income effect reinforce the substitution effect? Under what conditions does it have an offsetting effect? If the income effect more than offsets the substitution effect for a good, what do we call that good?
3.3 Cori eats eggs and toast for breakfast and insists on having three pieces of toast for every two eggs she eats. What is her utility function? If the price of eggs increases but we compensate Cori to make her just as “happy” as she was before the price change, what happens to her consumption
3.2 Steve’s utility function is U = BC, where B = veggie burgers per week and C = packs of cigarettes per week. Here, MUB = C and MUC = B.What is his marginal rate of substitution if veggie burgers are on the vertical axis and cigarettes are on the horizontal axis? Steve’s income is $120, the
3.1 Michelle spends all her money on food and clothing.When the price of clothing decreases, she buys more clothing.a. Does the substitution effect cause her to buy more or less clothing? Explain. (If the direction of the effect is ambiguous, say so.)b. Does the income effect cause her to buy more
2.6 Could an individual’s Engel curve be the mirror image of the one in the Application “Fast-Food Engel Curve” (quantity is first decreasing and then increasing with income)? Show in a figure. Can you think of a good where such a figure would apply?
2.5 Using calculus, show that not all goods can be inferior. (Hint: Start with the identity that y = p1q1 + p2q2 + c + pnqn.) C
2.4 Don spends his money on food and on operas.Food is an inferior good for Don. Does he view an opera performance as an inferior or a normal good? Why? In a diagram, show a possible incomeconsumption curve for Don.
2.3 Hugo views donuts and coffee as perfect complements:He always eats one donut with a cup of coffee and will not eat a donut without coffee or drink coffee without a donut. Derive and plot Hugo’s Engel curve for donuts. How much does his weekly budget have to rise for Hugo to buy one more donut
2.2 Have your folks given you cash or promised to leave you money after they’re gone? If so, your parents may think of such gifts as a good. They must decide whether to spend their money on fun, food, drink, cars, or on transfers to you. Hmmm.Altonji and Villanueva (2007) estimated that, for
2.1 Derive and plot Olivia’s Engel curve for pie if she eats pie only à la mode and does not eat either pie or ice cream alone (pie and ice cream are perfect complements). (Hint: See Solved Problem 5.2.)
1.7 Derive the demand curve for pizza, Z, if Lisa’s utility function is U = Z0.25B0.75, where B is burritos.
1.6 Illustrate the effect of cheaper phones in the Philippines that is described in the Application“Smoking Versus Eating and Phoning” using a figure similar to Figure 5.1.
1.5 How would your answer to Question 1.4 change if U = ln(M + N), so that consumers have diminishing marginal utility of diamonds? A
1.4 Manufactured diamonds have become as big and virtually indistinguishable from the best natural diamonds. In 2013, manufactured diamonds retailed for between 20% and 30% less than mined diamonds. Suppose consumers change from believing that manufactured diamonds, M, were imperfect substitutes
1.3 Derive and plot Olivia’s demand curve for pie if she eats pie only à la mode and does not eat either pie or ice cream alone (pie and ice cream are perfect complements). (Hint: See Solved Problem 5.1.)
1.2 In Figure 5.1, how does Mimi’s utility at E1 on D1 compare to that at E2?As we move down from the highest point on an individual’s downward-sloping demand curve, must the individual’s utility rise?
1.1 Draw diagrams similar to Figure 5.1 showing that the price-consumption curve can be horizontal or downward sloping.
We now return to the questions raised at the beginning of the chapter: For a given government expenditure, does a childcare per-hour subsidy or a lump-sum subsidy provide greater benefit to recipients? Which option increases the demand for childcare services by more? Which one inflicts less cost on
Kathy loves apple pie à la mode (a slice of pie with a scoop of vanilla ice cream on top) but she doesn’t like apple pie by itself or vanilla ice cream by itself. That is, she views apple pie and vanilla ice cream as perfect complements. At the initial prices, she consumed two pieces of pie per
Mahdu views Coke, q, and Pepsi as perfect substitutes: He is indifferent as to which one he drinks. The price of a 12-ounce can of Coke is p, the price of a 12-ounce can of Pepsi is p*, and his weekly cola budget is Y. Derive Mahdu’s demand curve for Coke using the method illustrated in Figure
6.4 Until 2012, California, Pennsylvania, and Texas required firms to collect sales taxes for online sales if the chain had a physical presence (a “brick” store as opposed to a “click” store) in those states. Thus, those states collected taxes on Best Buy’s online sales, because it had
6.2 West Virginians who live near the border with other states can shop on either side of the border.If they buy food in West Virginia, their total cost is the price of the food plus the tax. If they buy across the border in states that do not tax food, the total cost is the price plus the cost due
6.1 Suppose the Challenge Solution were changed so that Max and Bob have identical tastes, with the usual-shaped indifference curves. Use a figure to discuss how the different slopes of their budget lines affect the bundles of printed books and e-books that each chooses. Can you make any
5.2 Why would a consumer’s demand for a supermarket product change when the product price is quoted inclusive of taxes rather than before tax? Is the same effect as likely for people buying a car?(Hint: See the Application “Unaware of Taxes.”)
5.1 Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90°. Suppose that the prices change, so the slope of the budget line through the endowment changes. Use the diagram to explain why an individual whose endowment point is at the kink
4.21 In Solved Problem 4.4, if the generic bleach increases its strength to equal that of Clorox without changing its price, what bundles will Chris buy if the price of Clorox is $3 or $2?
4.20 The local swimming pool charges nonmembers$10 per visit. If you join the pool, you can swim for$5 per visit but you have to pay an annual fee of F.Use an indifference curve diagram to find the value of F such that you are indifferent between joining and not joining. Suppose that the pool
4.19 Federal housing and food stamp subsidy programs are two of the largest in-kind transfer programs for the poor. President Barack Obama’s 2011 budget allocated the Housing Choice Voucher Program $19.6 billion. Many poor people are eligible for both programs: 30% of housing assistance
4.18 Is a wealthy person more likely than a poor person to prefer to receive a government payment of $100 in cash to $100 worth of food stamps? Why or why not?
4.17 Is a poor person more likely to benefit from $100 a month worth of food stamps (that can be used only to buy food) or $100 a month worth of clothing stamps (that can be used only to buy clothing)?Why?
4.16 Since 1979, recipients have been given food stamps.Before 1979, people bought food stamps at a subsidized rate. For example, to get $1 worth of food stamps, a household paid about 15¢ (the exact amount varied by household characteristics and other factors). What is the budget constraint
4.15 Show how much an individual’s opportunity set increases if the government gives food stamps rather than sells them at subsidized rates.
4.14 A poor person who has an income of $1,000 receives $100 worth of food stamps. Draw the budget constraint if the food stamp recipient can sell these coupons on the black market for less than their face value.
4.13 Maureen only drinks a cup of coffee with one teaspoon of sugar. In an indifference curve–budget line diagram, show the bundle of coffee and sugar that gives her the most pleasure. Are her indifference curve and the budget line tangent at that bundle?
4.12 According to towerswatson.com, at large employers, 48% of employees earning between $10,000 and $24,999 a year participated in a voluntary retirement savings program, compared to 91% who earned more than $100,000. We can view savings as a good. In a figure, plot savings versus all other goods.
4.11 Salvo and Huse (forthcoming) found that roughly one-fifth of flexible-fuel (cars that can run on a mix of ethanol and gasoline) car owners choose gasoline when the price of gas is 20% above that of ethanol (in energy-adjusted terms) and, similarly, one-fifth of motorists choose ethanol when
4.10 Felix chooses between water and all other goods.If he spends all his money on water, he can buy 12 thousand gallons per week. At current prices, his optimal bundle is e1. Show e1 in a diagram. During a drought, the government limits the number of gallons per week that he may purchase to 10
4.9 Diogo has a utility function U(B, Z) = ABαZβ, where A, α, and β are constants, B is burritos, and Z is pizzas. If the price of burritos, pB, is $2 and the price of pizzas, pZ, is $1, and Y is $100, what is Diogo’s optimal bundle? C
4.8 Vasco’s utility function is U = 10X2Z. The price of X is pX = $10, the price of Z is pz = $5, and his income is Y = $150. What is his optimal consumption bundle? (Hint: See Appendix 4B.) Show this bundle in a graph. C
4.7 Linda loves buying shoes and going out to dance.Her utility function for pairs of shoes, S, and the number of times she goes dancing per month, T, is U(S, T) = 2ST, so MUS = 2T and MUT = 2S. It costs Linda $50 to buy a new pair of shoes or to spend an evening out dancing. Assume that she
4.6 David’s utility function is U = B + 2Z, so MUB = 1 and MUZ = 2. Describe the location of his optimal bundle (if possible) in terms of the relative prices of B and Z. A
4.5 Andy purchases only two goods, apples (a) and kumquats (k). He has an income of $40 and can buy apples at $2 per pound and kumquats at $4 per pound. His utility function is U(a, k) = 3a + 5k.That is, his (constant) marginal utility for apples is 3 and his marginal utility for kumquats is 5.
4.4 Ralph usually buys one pizza and two colas from the local pizzeria. The pizzeria announces a special:All pizzas after the first one are half-price. Show the original and new budget constraint. What can you say about the bundle Ralph will choose when faced with the new constraint?
4.3 Suppose that Boston consumers pay twice as much for avocados as for tangerines, whereas San Diego consumers pay half as much for avocados as for tangerines. Assuming that consumers maximize their utility, which city’s consumers have a higher marginal rate of substitution of avocados for
4.2 Some of the largest import tariffs, the tax on imported goods, are on shoes. Strangely, the cheaper the shoes, the higher the tariff. The highest U.S. tariff, 67%, is on a pair of $3 canvas sneakers, while the tariff on $12 sneakers is 37%, and that on $300 Italian leather imports is 12% (Blake
4.1 What happens to a consumer’s optimum if all prices and income double? (Hint: What happens to the intercepts of the budget line?)
3.5 Change Solved Problem 4.3 so that Lisa’s budget and the price of pizza double, but the price of burritos remains constant. Show how her budget constraint and opportunity set changes. Is Lisa necessarily better off than before these changes?(Hint: What happens to the intercepts of the budget
3.4 What is the effect of a 50% income tax on Dale’s budget line and opportunity set?
3.3 What is the effect of a quota of 13 thousand gallons of water per month on the opportunity set of the consumer in Solved Problem 4.2?
3.2 What happens to the budget line if the government applies a specific tax of $1 per gallon on gasoline but does not tax other goods? What happens to the budget line if the tax applies only to purchases of gasoline in excess of 10 gallons per week?
3.1 Suppose Gregg consumes chocolate candy bars and oranges. He is given four candy bars and three oranges. He can buy or sell a candy bar for $2 each. Similarly, he can buy or sell an orange for$1. If he has no other source of income, draw his budget constraint and write the equation. What is the
2.5 José Maria’s utility function is U(B, Z) = ABαZβ.What is his marginal utility of B? What is his marginal utility of Z? What is his marginal rate of substitution between B and Z?
2.4 Julia consumes cans of anchovies, A, and boxes of biscuits, B. Each of her indifference curves reflects strictly diminishing marginal rates of substitution.Where A = 2 and B = 2, her marginal rate of substitution between cans of anchovies and boxes of biscuits equals -1(= MUA/MUB). Will she
2.3 If Joe views two candy bars and one piece of cake as perfect substitutes, what is his marginal rate of substitution between candy bars and cake?
2.2 Fiona requires a minimum level of consumption, a threshold, to derive additional utility: U(X, Z) is 0 if X + Z … 5 and is X + Z otherwise. Draw Fiona’s indifference curves. Which of our usual assumptions are violated by this example?
2.1 Does the utility function V(Z, B) = α + [U(Z, B)]2 give the same ordering over bundles as does U(Z, B)? A
1.8 Which of the following pairs of goods are complements and which are substitutes? Are the goods that are substitutes likely to be perfect substitutes for some or all consumers?a. A popular novel and a gossip magazineb. A razor and a bladec. A gun and a stick of butterd. A Panasonic DVD player
1.7 Sofia will consume hot dogs only with whipped cream.Show her preference map. What is her utility function?
1.6 Miguel considers tickets to the Houston Grand Opera and to Houston Astros baseball games to be perfect substitutes. Show his preference map.What is his utility function?
1.5 Arthur spends his income on bread and chocolate.He views chocolate as a good but is neutral about bread, in that he doesn’t care if he consumes it or not. Draw his indifference curve map.
1.4 Don is altruistic. Show the possible shape of his indifference curves between charity and all other goods.
1.2 Can an indifference curve be downward sloping in one section, but then bend backward so that it forms a “hook” at the end of the indifference curve?(Hint: See Solved Problem 4.1.)
1.1 Give as many reasons as you can why we believe that economists assume that the more-is-better property holds and describe how these explanations relate to the results in the Application “You Can’t Have Too Much Money.”
Why do Germans largely ignore e-books, while many Americans are quickly switching to this technology? While it’s possible that this difference is due to different tastes in the two countries, there’s evidence that attitudes toward e-books is similar in the two countries. For example, according
The concentration of the active ingredient, sodium hypochlorite, in Clorox is twice that of the generic brand. Consequently, Chris views one cup of Clorox to be a perfect substitute for two cups of the generic. If Clorox costs $3 gallon, the generic costs$1, and Chris allocates Y = $6 per year,
Water rationing is common during droughts. From 2010–2013, water quotas were imposed in areas of California, Texas, Oklahoma, Florida, the U.S. Great Plains, and the U.S. Midwest, as well as in Egypt, Honduras, India, Kenya, New Zealand, Pakistan, and Venezuela. Rationing affects consumers’
5.2 Ten million tourists visited New Orleans in 2004.However, in 2005, Hurricane Katrina damaged many parts of New Orleans and disrupted the tourist business in the years thereafter. Only 3.7 million tourists visited New Orleans in 2006 and 7.1 million in 2007. Subsequent hurricanes also
5.1 The Challenge Solution says that a gas tax is roughly equally shared by consumers and firms in the long run. If so, what can you say about the elasticities of supply and demand? If in the short run the supply curve is nearly vertical, what (if anything)can you infer about the demand elasticity
4.20 For a tax on sugar or fat to reduce the consumption of fattening foods and drinks by a very large amount, what elasticities should the demand and supply curves have? (Hint: See the Application“Taxes to Prevent Obesity.”)
4.19 Essentially none of the savings from removing the federal ad valorem tax were passed on to consumers for motion picture admissions and club dues(Brownlee and Perry, 1967; see Question 4.18).List the conditions (in terms of the elasticities or shapes of supply or demand curves) that are
4.18 On July 1, 1965, the federal ad valorem taxes on many goods and services were eliminated. By comparing the prices from before and after this change, we can determine how much the price fell in response to the tax’s elimination. When the tax was in place, the tax per unit on a good that sold
4.17 Algebraically solve for the after-tax equilibrium price and quantity in the corn market if a specific tax of t = $2.40 is applied to customers, as panel b of Figure 3.6 illustrates. (Hint: See Solved Problem 3.4.) A
4.16 If the inverse demand function is p = a - bQ and the inverse supply function is p = c + dQ, show that the incidence of a specific tax of t per unit falling on consumers is b/(b +d) = η/(η - ε). A
4.15 Do you care whether a 15¢ tax per gallon of milk is collected from milk producers or from consumers at the store? Why?
4.14 What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly elastic and supply is perfectly inelastic? What is the incidence on consumers? Explain. (Hint: See Solved Problems 3.5 and 3.6.)
4.13 What is the effect of a $1 specific tax on equilibrium price and quantity if supply is perfectly inelastic?What is the incidence on consumers? Explain.(Hint: See Solved Problems 3.5 and 3.6.)
4.12 What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly elastic?What is the incidence on consumers? Explain.(Hint: See Solved Problems 3.5 and 3.6.)
4.11 What is the effect of a $1 specific tax on equilibrium price and quantity if demand is perfectly inelastic? What is the incidence on consumers?Explain. (Hint: See Solved Problems 3.5 and 3.6.)
4.10 The United Kingdom has a drinking problem. British per-capita consumption of alcohol rose 19%between 1980 and 2007, compared with a 13% decline in other developed countries. Worried about excessive drinking among young people, the British government increased the tax on beer by 42% from 2008
4.9 A constant elasticity supply curve, Q = Bpη, intersects a constant elasticity demand curve, Q = Apε, where A, B, η, and ε are constants. What is the incidence of a $1 specific tax? Does your answer depend on where the supply curve intersects the demand curve? Why? A

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