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Microeconomics 1st Edition Austan Goolsbee, Steven Levitt, Chad Syverson - Solutions

6. What is the marginal rate of technical substitution?What does it imply about an isoquant’s shape?
5. How does the amount of output change as the isoquants are farther from the graph’s origin?Why can’t two isoquants cross?
4. What does the diminishing marginal product of labor tell us about the relationship between labor inputs and marginal product?
3. Why is a firm’s marginal product of labor more relevant than the marginal product of capital in the short run?
2. What does a production function tell us?
1. What are the differences between a firm’s production in the short run and the long run?
4. A firm has the production function Q = K 0.4 L 0.6 .The wage is $60, and the rental rate of capital is$20. Find the firm’s long-run expansion path.
3. Catalina Films produces video shorts using digital editing equipment (K) and editors (L). The firm has the production function Q = 30K 0.67 L 0.33 , where Q is the hours of edited footage. The wage is $25, and the rental rate of capital is $50. The firm wants to produce 3,000 units of output at
2. A more general form of the Cobb – Douglas production function is given by Q = AK α L βwhere A, α, and β are positive constants.a. Solve for the marginal products of capital and labor.b. For what values of α and β will the production function exhibit diminishing marginal returns to
1. For the following production functions,• Find the marginal product of each input.• Determine whether the production function exhibits diminishing marginal returns to each input.• Find the marginal rate of technical substitution and discuss how MRTS LK changes as the firm uses more L,
20. At a price of $3 each, Yoshi (a typical New Yorker) drinks 200 44-ounce sodas each year.Concerned about burgeoning obesity, the Mayor of New York proposes a $0.50 tax on such drinks. He then proposes compensating consumers for the price increase by mailing each resident a check for $100.a. What
19. Brady, who has ordinary-shaped indifference curves, buys 16 ounces of salt each year. Even when the price of salt doubles, Brady continues to purchase exactly 16 ounces.a. True or False (and explain): Salt is neither inferior nor normal to Brady.b. What is Brady’s price elasticity of demand
18. Mitch cares only about how much he can write.Because a pen will write 7 miles of text and a pencil will write 35 miles of text, Mitch considers them perfect 5-to-1 substitutes. If the price of pens is given by P pen and the price of pencils is given by P pencil , and if Mitch’s income is
17. Armen lives in Washington State, where grapes are grown. Armen’s twin Allen lives in New York, where grapes must be trucked in from Washington at a fixed cost of $0.20 per pound of grapes. Armen and Allen have identical tastes, but Armen tends to purchase lower-quality grapes and Allen tends
16. True or False: If pizza and calzones are substitutes, then the substitution effect of a price change will be in a different direction than if pizza and calzones are complements. Explain, using a diagram.
15. Consider Harry’s indifference curve indicated in the graph below:a. True or False (and explain): Peanuts and Crackerjack are clearly complements.b. True or False (and explain): Peanuts and Crackerjack are clearly both normal goods. Peanuts U Crackerjack
14. Consider the following diagram, which illustrates Gaston’s preferences for red beans and rice. Gaston has an income of $20. Rice costs $2 per serving.a. Derive Gaston’s demand for red beans. Use prices of $2 and $4 in your analysis. Graph your results, and connect the points you plotted to
13. Carmen’s preferences are such that she is always indifferent between watching two movies or seeing one basketball game.a. What must Carmen’s indifference curves look like?b. Suppose that Carmen has an income of $90.If a movie costs $10 and a basketball game costs $18, what will Carmen’s
12. Consider the following three graphs, which illustrate the preferences of three consumers (Bob, Carol, and Ted) regarding two goods, apples and peaches. Each consumer has an income of$30, and each consumer pays $2 for apples and$3 for peaches.a. Suppose that the price of peaches falls to $2.
11. Consider the following graph, which illustrates Tyler’s preferences for DVD rentals and in-theater movie tickets:Suppose that DVD rentals always cost $1, and that Tyler’s income is $100 per week.a. If the price of a movie ticket is $10, draw Tyler’s budget line. Be very careful to draw to
10. Josie gets great pleasure from eating flan. Her preferences for flan and tofu are given in the graph below:Suppose that Josie’s income is $40, and that tofu costs $1.a. Draw budget constraints for Josie given three different prices for flan: $5, $8, and $10.b. Find the optimal consumption of
9. Suppose that Grover consumes two goods, cookies and milk. Grover’s income expansion path is shown in the diagram below. Use the information in the diagram to explain whether each of the statements below is true or false. Provide an explanation for each answer.a. At low levels of income, both
8. Indicate whether the following statements are true, false, or uncertain. If false or uncertain, explain why.a. The price of a watch increases by 10%, and you spend a larger fraction of your income on it. The watch is a Giffen good.b. Due to a flood, corn prices and soybean prices increase. If
7. You may have noticed that the market demand curve is always flatter than any individual demand curve. Is market price elasticity of demand also always lower than individual price elasticity of demand? Why or why not?
6. Kim’s utility function is given by U = 5X + 2Y, where M U X = 5 and M U Y = 2.a. Suppose that at the prices P X and P Y of good X and good Y, respectively, Kim is consuming(optimally) some positive amount of good X and some positive amount of good Y.What is the price of good X in terms of the
*5. Suppose that Sonya faces an increase in the price of pasta, as depicted below, moving her from an optimum bundle of rice and pasta at A to an optimal bundle at B.a. Trace a copy of this diagram. Graphically depict the substitution and income effect.b. Which effect is strongest? How can you
4. Suppose that, holding prices constant, Alice has preferences over the number of books she purchases that look like:a. Draw a smooth approximation of Alice’s Engel curve for books, indicating the ranges over which books are inferior goods and over which they are normal goods.b. A luxury good is
*3. Andrew has an income of $30 he spends on cupcakes and cakes. The price of a cupcake is $5.Suppose that Andrew has the following preferences depicted below:a. With this in mind, draw Andrew’s demand curve for cake.b. When the price of cake changes, which effect is stronger, the substitution
2. Can you tell whether a good is normal or inferior by looking at the shape of a single indifference curve? Explain your answer.
1. A principles of microeconomics instructor regularly asks her class to give an example of an inferior good. “No matter how poor we might be,” the students tell her, “ramen noodles are an inferior good.” Explain why the students must be wrong in their reasoning.
14. Why will a market demand curve always be at least as flat as a given individual demand curve?
13. How does the market demand relate to individual demand curves?
12. What can the shape of the indifference curve tell us about two goods?
11. When the cross-price elasticity of demand is positive, are the two goods complements or substitutes?What type of goods have a negative cross-price elasticity?
10. What are complements and substitutes?
9. What is a Giffen good?
8. How do income and substitution effects differ between normal and inferior goods?
7. Describe how to decompose the consumer’s response to price changes into the substitution and income effects.
6. Define the substitution effect. How does it relate to the income effect?
5. Name at least three factors that can shift an individual’s demand curve for pizza. Also describe the effect each factor has on demand (e.g., does it rise or fall?).
4. Describe how we can derive a consumer’s demand curve from his indifference curves. Why would we expect the demand curve to slope downward?
3. Both the income expansion path and the Engel curve show the effect of income on consumption choices. When might you choose to use the income expansion path? When might the Engel curve be more useful?
2. What are the differences between normal goods, inferior goods, and luxury goods?
1. Define the income effect. What variables do we hold constant in order to isolate the income effect?
2. Suppose that a consumer has utility given by U(X,Y ) = XY + 10Y and income of $100 to spend on goods X and Y.a. The prices of X and Y are both $1 per unit. Use a Lagrangian to solve for the optimal basket of goods.b. Suppose that the price of X increases to $5 per unit. Use a Lagrangian to solve
1. Malachi only consumes 2 goods: DVD rentals and coffee.His utility function is U(R,C) = R 0.75 C 0.25 where R is the number of rentals and C is cups of coffee. Malachi has $16 in his pocket right now, and he plans to spend all of the $16 on DVD rentals and coffee today.a. The price of one rental
5. Suppose that a consumer’s utility function for two goods (X and Y) is U(X,Y) = 10X 0.5 + 2Y The price of good X is $5 per unit and the price of good Y is $10 per unit. Suppose that the consumer must have 80 units of utility and wants to achieve this level of utility with the lowest possible
4. Katie likes to paint and sit in the sun. Her utility function is U(P, S) = 3PS + 6P, where P is the number of paint brushes and S is the number of straw hats. The price of a paint brush is $1 and the price of a straw hat is $5. Katie has $50 to spend on paint brushes and straw hats.a. Solve
3. Suppose that there are two goods (X and Y). The price of X is $2 per unit, and the price of Y is $1 per unit. There are two consumers (A and B). The utility functions for the consumers are U A (X,Y) = X 0.5 Y 0.5 U B (X,Y) = X 0.8 Y 0.2 Consumer A has an income of $100, and Consumer B has an
2. Suppose that Maggie cares only about chai and bagels.Her utility function is U = CB, where C is the number of cups of chai she drinks in a day, and B is the number of bagels she eats in a day. The price of chai is $3, and the price of bagels is $1.50. Maggie has $6 to spend per day on chai and
1. For the following utility functions,• Find the marginal utility of each good.• Determine whether the marginal utility decreases as consumption of each good increases (i.e., does the utility function exhibit diminishing marginal utility in each good?).• Find the marginal rate of
20. Elaine loves receiving flowers and has a particular fondness for daisies and daffodils. Her relative preferences for the two flowers are illustrated by the set of utility curves in the diagram. The number at the bottom of each indifference curve indicates the amount of happiness she receives
19. Suppose that doctors’ visits cost $20, and the typical consumer has an income of $100. Consumers spend all of their incomes on doctors’visits and a “composite good” that costs $1 per unit.a. Draw a graph that illustrates the consumer’s budget constraint, putting doctor’s visits on
18. A prominent online movie rental service mails rental DVDs to consumers. The service offers two pricing plans. Under the first plan, consumers face a flat $10 fee each month and can rent as many DVDs as they wish for free. Under the second plan, consumers can rent DVDs for an àla carte price of
17. Anthony spends his income on fishing lures (L )and guitar picks (G ). Lures are priced at $2, while a package of guitar picks cost $1. Assume that Anthony has $30 to spend and his utility function can be represented as U(L,G ) = L 0.5 G 0.5 .For this utility function, M U L = 0.5 L – 0.5 G
16. Suppose that there are only two goods, books and coffee. Wally gets utility from both books and coffee, but his indifference curves between them are concave rather than convex to the origin.a. Draw a set of indifference curves for Wally.b. What do these particular indifference curves tell you
15. For Mitzi, shampoo and conditioner are perfect complements. She likes to use 1 squirt of shampoo and 1 squirt of conditioner each time she washes her hair.a. Draw a set of indifference curves for Mitzi that illustrate the utility she derives from using shampoo and conditioner.b. Assume that
14. Good X sells for $4, and good Y sells for $2. At your current level of consumption, the marginal rate of substitution between X and Y is 4.a. Are you maximizing your utility?b. If not, are you buying too much X or too much Y ? Explain.
13. Matthew is redecorating his apartment. The amount of utility he gets from chairs and couches is listed in the table below, where each number represents how much utility (in utils) he receives from the combination of chairs and couches:a. What is the marginal utility from buying an additional
12. Suppose that only one person in the world sells ice cream. He employs a strange pricing policy:You can buy 1 ice cream cone for $1, but if you buy 2 cones, you have to pay $2 each. If you buy 3, you have to pay $3 each, etc., so that if you buy 10, you have to pay $10 each. You have$100 dollars
11. Josie gets satisfaction from both music and fireworks.Josie’s income is $240 per week. Music costs $12 per CD, and fireworks cost $8 per bag.a. Graph the budget constraint Josie faces, with music on the vertical axis and fireworks on the horizontal axis.b. If Josie spends all her income on
10. If Harry considers Cubs tickets a “good” and White Sox tickets a “bad,” draw a set of indifference curves for Harry.
9. Andrea loves to eat burritos with hot sauce. In fact, she cannot enjoy a burrito (B ) unless it has three servings of hot sauce (H ). She gets no additional enjoyment from more than three servings per burrito. Thus, her utility function is U = min{B,_ 13 H }. Graph Andrea’s indifference curves
8. Kelly’s utility function is given by U = 5X + 2Y, where M U X = 5 and M U Y = 2.a. What is MR S XY ?b. What is MR S XY when X = 1 and Y = 5?When X = 2 and Y = 2.5?c. Draw a sample indifference curve.
*7. A consumer’s utility function is given by U = XY, where M U X = Y and M U Y = X.a. What is the utility derived from 1 unit of X and 2 units of Y ? What is the utility derived from 2 units of X and 1 unit of Y ? What is the utility derived from 5 units of X and 2 units of Y ?b. How does the
6. The table below displays the total utility U(X )that corresponds to the number of units of X consumed by three different consumers (Abe, Barbara, and Chuck), holding everything else constant:a. Compute the marginal utility of X for each of the three consumers at each level of X.b. Based on the
*5. Suppose that John is indifferent between consuming bundle A, which consists of 4 apples and 1 peach, and bundle B, which consists of 4 peaches and 1 apple. If John were given the choice between bundle A and bundle C, which contained 3 peaches and 2 apples, which should he pick? (Hint: Draw an
*4. Draw two indifference curves for each of the following pairs of goods. Put the quantity of the first good on the horizontal axis and the quantity of the second good on the vertical axis.a. Paul likes pencils and pens.b. Rhonda likes carrots and dislikes broccoli.c. Emily likes hip‐hop iTunes
3. In Arbitrageville, 1 orange can be exchanged for 4 apples, and 4 apples for 1 orange. The mayor of Arbitrageville likes oranges a lot. He buys 100 oranges and 1 apple at the grocery store. As the mayor piles oranges onto the checkout counter, he tells the clerk, “I just love these oranges.In
2. By assumption, individual preferences must be transitive so that if A is preferred to B, and B is preferred to C, then A is preferred to C. Suppose that Marsha, Jan, and Cindy individually have transitive preferences over three goods: oranges, apples, and pears. If Marsha, Jan, and Cindy were to
1. Which assumption about consumer preferences does each of the following individuals violate?a. Randy likes basketball more than football;football more than baseball; and baseball more than basketball.b. Paula prefers prune juice to orange juice but cannot decide how she feels about grapefruit
15. What is the difference between these approaches:utility maximization and expenditure minimization?
14. At the point of tangency, what is true about the ratio of the goods’ marginal utilities and the ratio of their prices?
13. What do we call the bundle represented by the point of tangency between the consumer’s indifference curve and her budget constraint?
12. What determines the slope of a budget constraint?What situation would change the slope of a budget constraint?
11. What is a budget constraint?
10. Describe the three assumptions we make when incorporating income into our model of consumer behavior.
9. In addition to utility, what other factors determine how much of a good to buy?
8. When are two goods perfect complements?What does the indifference curve look like?
7. When are two goods perfect substitutes? What does the indifference curve look like, or what is its curvature?
6. What does a steep indifference curve indicate about a consumer’s preferences? What does a flat indifference curve say?
5. Why does the slope of the indifference curve vary along the curve? What does this variability tell us about consumers’ preferences?
4. We learned that the slope of the indifference curve is called the marginal rate of substitution of X for Y. What does the MR S XY tell us about a consumer’s preferences between two goods?
3. Define “indifference curve.” What does an indifference curve tell us about the consumer?
2. What does the term “utility” mean? How does utility relate to a utility function?
1. We make four assumptions about preferences:completeness and rankability, “more is better,”transitivity, and consumers want variety. Briefly describe each assumption.
19. Consider the following fiscal scheme designed to directly transfer welfare from coffee drinkers to coffee vendors: The government will impose a$1.00 tax, collected from buyers, for each cup of coffee sold. The government will then subsidize coffee vendors $1.00 for each cup of coffee sold.a.
18. The U.S. Senate is considering a bill that would tax the sale of laptop computers in order to fund a computer education program for presidential hopefuls. The Congressional Budget Office(CBO) estimates that if it implements a low tax of $12 per laptop, revenue should be sufficient to exactly
17. Draw a graph for a competitive market with a relatively elastic demand curve and inelastic supply curve. Illustrate on the graph the impact of imposing a per unit tax on the suppliers of the good in terms of consumer and producer surplus, prices and quantities, as well as how much deadweight
16. Social Security taxes are taxes on the sale of labor services. Half of Social Security taxes are generally collected from the employer and half from the employee. Does this seem like a good way to structure the tax collection? Can the government dictate who bears what share of the burden of a
15. The demand for ice cream is given by Q D =20 – 2P, measured in gallons of ice cream. The supply of ice cream is given by Q S = 4P – 10.a. Graph the supply and demand curves, and find the equilibrium price and quantity of ice cream.b. Suppose that the government legislates a $1 tax on a
14. Consider the market for Cheese Puff Snacks(Q is in bags of Cheese Puffs). The demand for Cheese Puff Snacks is Q D = 30 – P and the supply is Q S = 3P – 10. To pay for classes about healthy snacking, the government imposes a $4 per bag tax on Cheese Puffs.a. What are the price paid by
13. Why do taxes create a deadweight loss the same way that regulations do? If a tax and a quota raise prices by the same amount, which causes more deadweight loss? Explain.
12. For decades, the mob ran a “numbers game”in which participants who matched three numbers chosen at random would win a prize. In the 1970s, state governments began authorizing state lottery commissions; those commissions typically offered games similar in structure to the numbers game. Using
11. Draw a graph illustrating the impact of imposing a quota on production in a market, where the quota is less than the current equilibrium quantity. What happens to the price of the good, producer surplus, and consumer surplus?Show the deadweight loss from the quota.
10. The diagram below illustrates the market for beef. Suppose that the government has instituted a price support program for beef by placing a price floor at $4.00 per pound. Under the program, any unsold beef will be purchased by the government and placed in long-term storage.a. What is the cost
9. Low-skilled workers operate in a competitive market. The labor supply is Q S = 10W (where W is the price of labor measured by the hourly wage) and the demand for labor is Q D =240 – 20W. Q measures the quantity of labor hired (in thousands of hours).a. What is the equilibrium wage and quantity
8. Is it possible that a regulation like the minimum wage, which is specifically designed to help low-income people, could actually reduce their income? If so, under what supply and demand conditions might this happen?
*7. The Ministry of Tourism in the Republic of Palau estimates that the demand for its scuba diving tours is given by Q D = 6,000 – 20P, where Q is the number of divers served each month and P is the price of a two-tank dive. The supply of scuba diving tours is given by Q S = 30P – 2,000.a.
6. Holding price and quantity constant, why does the consumer surplus from a product decline if the demand curve becomes more elastic?

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