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microeconomics
Microeconomics 9th Edition Robert Pindyck, Daniel Rubinfeld - Solutions
=+a. What is the expected value of Richard’s payoff if he buys a lottery ticket?
=+What are the four mutually exclusive states of the world that you should be concerned about?
=+2. Suppose you have invested in a new computer company whose profitability depends on two factors: (1)whether the U.S. Congress passes a tariff raising the cost of Japanese computers and (2) whether the U.S.economy grows slowly or quickly.
=+exceeds the expected value of the loss being insured against?
=+5. Why do people often want to insure fully against uncertain situations even when the premium paid
=+4. What does it mean for consumers to maximize expected utility? Can you think of a case in which a person might not maximize expected utility?
=+Should George pick mutual fund A or fund B?
=+3. George has $5000 to invest in a mutual fund. The expected return on mutual fund A is 15 percent and the expected return on mutual fund B is 10 percent.
=+where X is his consumption of CDs with a price of $1 and Y is his consumption of movie videos, with a rental price of $2. He plans to spend $41 on both forms of entertainment. Determine the number of CDs and video rentals that will maximize Maurice’s utility.
=+5. Maurice has the following utility function:U(X,Y) = 20X + 80Y - X2 - 2Y2
=+c. What is the marginal utility of income?
=+b. Assume that her income I = $100. How many candy bars and how many espressos will Sharon consume?
=+a. Derive Sharon’s demand for candy bars and espresso.
=+4. Sharon has the following utility function:U(X,Y) = 1X + 1Y where X is her consumption of candy bars, with price PX = $1, and Y is her consumption of espressos, with PY = $3.
=+What is the substitution effect?
=+3. Assume that a utility function is given by Min(X, Y), as in Exercise 1(c). What is the Slutsky equation that decomposes the change in the demand for X in response to a change in its price? What is the income effect?
=+2. Show that the two utility functions given below generate identical demand functions for goods X and Y:a. U(X,Y) = log (X) + log (Y)b. U(X,Y) = (XY)5
=+c. U(X,Y) = Min(X,Y), where Min is the minimum of the two values of X and Y.
=+1. Which of the following utility functions are consistent with convex indifference curves and which are not?a. U(X,Y) = 2X + 5Yb. U(X,Y) = (XY)5
=+e. Would you expect the demand curve for potatoes to continue to follow this trend indefinitely? Why or why not?
=+d. What kind of good is the potato?
=+c. Now suppose that the price of a potato increases to $1.25. How much will the consumer purchase of each good?
=+ How much will the consumer purchase of each good?
=+b. Now suppose that the price of a potato increases to$1.
=+How much will the consumer purchase of each good?
=+a. A potato costs $0.50 and the price of a steak is $10.
=+16. A consumer lives on a diet of solely steak and potatoes. Her budget is $30 for every 10 days, and she must buy enough potatoes to eat at least two potatoes per day.
=+there any additional information that would help you to provide a definitive answer?
=+PC is the price of cotton, PS the price of soybeans, and I income. Should you support or oppose the plan? Is
=+cooperative wants your advice as to whether this action will increase members’ revenues. Knowing that cotton (C) and soybeans (S) both compete for agricultural land in the South, you estimate the demand for cotton to be C = 3.5 - 1.0PC + 0.25PS + 0.50I, where
=+15. Suppose that you are the consultant to an agricultural cooperative that is deciding whether members should cut their production of cotton in half next year. The
=+but add that they see relatively few copies of Linux on sale at local stores. Vera chooses Windows. Can you explain her decision?
=+asks her friends, it turns out they all use PCs with Windows. They agree that Linux is more appealing
=+14. Vera has decided to upgrade the operating system on her new PC. She hears that the new Linux operating system is technologically superior to Windows and substantially lower in price. However, when she
=+d. The toll-bridge operator is considering an increase in the toll to $7. At this higher price, how many people would cross the bridge? Would the toll-bridge revenue increase or decrease? What does your answer tell you about the elasticity of demand?
=+you do know that in the first year you charged $45 and sold 1200 units and that in the second year you charged $30 and sold 1800 units.
=+12. You run a small business and would like to predict what will happen to the quantity demanded foryour product if you raise your price. While you do not know the exact demand curve for your product,
=+a. If a sales tax on food caused the price of food to increase to $2.50, what would happen to her consumption of food? (Hint: Because a large price change is involved, you should assume that the price elasticity measures an arc elasticity, rather than a point elasticity.)
=+price of food is $2, and that her income is $25,000.
=+11. Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is -1.0. Suppose also that Felicia spends $10,000 a year on food, the
=+from her grandparents next year. What is Judy’s price elasticity of demand for textbooks? Income elasticity?
=+8. Judy has decided to allocate exactly $500 to college textbooks every year, even though she knows that the prices are likely to increase by 5 to 10 percent per year and that she will be getting a substantial monetary gift
=+a. Graph the two demand curves on one graph, with P on the vertical axis and Q on the horizontal axis.If the current price of tickets is $35, identify the quantity demanded by each group.
=+ The demand curves for the general public (Qgp) and students (Qs)are given below:Qgp = 500 - 5P Qs = 200 - 4P
=+7. The director of a theater company in a small college town is considering changing the way he prices tickets. He has hired an economic consulting firm to estimate the demand for tickets. The firm has classified people who go to the theater into two groups and has come up with two demand
=+Graphically illustrate Sam’s leisure demand curve and Barb’s leisure demand curve. Place price on the vertical axis and leisure on the horizontal axis. Given that they both maximize utility, how can you explain the difference in their leisure demand curves?
=+to the hourly wage. We observe the following information about the choices that the two individuals make:SaM baRb SaM baRb pRIce oF G pRIce oF L L(houRS)L(houRS) G ($) G ($)1 8 16 14 64 80 1 9 15 14 81 90 1 10 14 15 100 90 1 11 14 16 110 88
=+between leisure hours and work hours. Assume that all hours not spent working are leisure hours. The price of a good is equal to $1 and the price of leisure is equal
=+6. Two individuals, Sam and Barb, derive utility from the hours of leisure (L) they consume and from the amount of goods (G) they consume. In order to maximize utility, they need to allocate the 24 hours in the day
=+Identify the income and substitution effects that result from a change in the price of good x1.
=+Draw a budget line-indifference curve graph that illustrates Jane’s three chosen bundles. What can you say about Jane’s preferences in this case?
=+5. Each week, Bill, Mary, and Jane select the quantity of two goods, x1 and x2, that they will consume in order to maximize their respective utilities. They each spend their entire weekly income on these two goods.
=+a. The demand for a specific brand of toothpaste and the demand for toothpaste in general
=+11. Explain which of the following items in each pair is more price elastic.
=+b. an increase in the income of U.S. citizensc. a cut in the industry’s costs of producing domestic clothes that is passed on to the market in the form of lower prices
=+7. Which of the following events would cause a movement along the demand curve for U.S. produced clothing, and which would cause a shift in the demand curve?a. the removal of quotas on the importation of foreign clothes
=+d. a plane trip and a train trip to the same destinatione. bacon and eggs
=+Can they be either in different circumstances? Discuss.a. a mathematics class and an economics classb. tennis balls and a tennis racketc. steak and lobster
=+c. an Engel curve and a demand curved. an income effect and a substitution effect
=+1. Explain the difference between each of the following terms:a. a price consumption curve and a demand curveb. an individual demand curve and a market demand curve
=+the cost of living index for 1990. Calculate the ideal and the Laspeyres cost-of-living index for Meredith for 2000. (Hint: Meredith will spend equal amounts on food and clothing with these preferences.)
=+prices of food and clothing are $1 per unit for each.By 2000, however, the price of food has increased to$2 and the price of clothing to $3. Let 100 represent
=+17. The utility that Meredith receives by consuming food F and clothing C is given by U(F,C) = FC. Suppose that Meredith’s income in 1990 is $1200 and that the
=+In addition, the price of food is $2 per unit, the price of clothing is $10 per unit, and Julio’s weekly income is $50.
=+16. Julio receives utility from consuming food (F)and clothing (C) as given by the utility function U(F,C) = FC.
=+a. Illustrate the indifference curve associated with a utility of 800 and the indifference curve associated with a utility of 1200.
=+day spent traveling domestically is $100, the price of a day spent traveling in a foreign country is $400, and Jane’s annual travel budget is $4000.
=+15. Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In addition, the price of a
=+What does her budget constraint look like now?
=+d. An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket ends its promotion.
=+to the first 20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes) are still $2 per pound. Draw her budget constraint.
=+c. Connie’s supermarket has a special promotion. If she buys 20 pounds of potatoes (at $2 per pound), she gets the next 10 pounds for free. This offer applies only
=+b. Suppose also that her utility function is given by the equation U(M,P) = 2M + P. What combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat and potatoes are perfect substitutes.)
=+d. Suppose that Brenda’s marginal rate of substitution(of gas mileage for styling) is equal to (3S)/G. What value of each index would she like to have in her car?
=+b. Suppose Brenda’s preferences are such that she always receives three times as much satisfaction from an extra unit of styling as she does from gas mileage. What type of car will Brenda choose?
=+price of the car increases by $5000. She also observes that as the gas-mileage index rises by one unit, the price of the car increases by $2500.
=+either the most styling or the best gas mileage. While looking at the list of cars, Brenda observes that on average, as the style index increases by one unit, the
=+a. Illustrate Ben’s optimal bundle on a graph with pizza on the horizontal axis.
=+12. Ben allocates his lunch budget between two goods, pizza and burritos.
=+in both states maximize utility, will the marginal rate of substitution of peaches for avocados be the same for consumers in both states? If not, which will be higher?
=+11. Consumers in Georgia pay twice as much for avocados as they do for peaches. However, avocados and peaches are the same price in California. If consumers
=+of new books and a 5 percent increase in the price of used books, Antonio’s father offers him $40 extra.
=+10. Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces that there will be a 10 percent increase in the price
=+many ounces of the drink to purchase. (Assume that Debra can costlessly dispose of any of the soft drink that she does not want.)
=+9. Debra usually buys a soft drink when she goes to a movie theater, where she has a choice of three sizes:the 8-ounce drink costs $1.50, the 12-ounce drink$2.00, and the 16-ounce drink $2.25. Describe the budget constraint that Debra faces when deciding how
=+When she reaches 25,000 miles, the airline will reduce the price of her tickets by 25 percent for the remainder of the year. When she reaches 50,000 miles, the airline
=+on which she typically flies has a frequent-traveler program that reduces the cost of her tickets according to the number of miles she has flown in a given year.
=+8. Anne has a job that requires her to travel three out of every four weeks. She has an annual travel budget and can travel either by train or by plane. The airline
=+what he still wants to purchase, identify the three different bundles of CDs and DVDs that he could choose. For this part of the question, assume that he cannot purchase fractional units.
=+b. Considering what he has already purchased and
=+Suppose that he has already bought one DVD and one CD. In addition, there are 3 more DVDs and 5 more CDs that he would really like to buy.
=+7. The price of DVDs (D) is $20 and the price of CDs (C)is $10. Philip has a budget of $100 to spend on the two goods.
=+for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games.
=+6. Suppose that Jones and Smith have each decided to allocate $1000 per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods.However, they differ substantially in
=+points that give Bridget the same level of utility as the bundle (10, 5). Do the same for Erin on a separate graph.
=+a. With food on the horizontal axis and clothing on the vertical axis, identify on a graph the set of
=+5. Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridget’s preferences are represented by the utility function U(F,C) = 10FC, while Erin’s preferences are represented by the utility function U(F,C) = .20F2 C2.
=+amount on each. Using indifference curves and budget lines, illustrate the choice that each person will make.
=+combination of the two. Janelle does not care at all about styling and wants the best gas mileage possible.Brian likes both equally and wants to spend an equal
=+c. Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite.
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