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QUESTIONS AND PROBLEMS
Check Your Understanding
1. Using a budget line, why does a decrease in the price of a good allow one to potentially consume more of both goods?
2. Why do price changes cause a budget line to pivot, while income changes cause a budget line to shift in a parallel manner?
3. Describe the utility-maximizing rule. Explain why it makes sense.
4. What conditions are necessary for total utility to be positive, while marginal utility is negative?
5. Why should sunk costs not be taken into consideration when making decisions about the present or the future?
6. Why do the prices of many goods and services end in 99 cents? Why don’t businesses just round to the nearest whole dollar?
Apply the Concepts
7. Scruffie the cat has $15 to spend each month on cat toys, which cost $3 each, and cat treats, which cost $1.50 each. Draw a budget line to show the combinations of each good that Scruffie can aff ord if she spends her entire budget. Now suppose that cat treats go on sale for $1 each. How does this change in price aff ect the budget line (describe and show on a graph)?
8. Eric enjoys having sushi and sashimi for lunch every day. Suppose the marginal utility of the last sushi roll Eric eats is 40 and the marginal utility of the last piece of sashimi Eric eats is 20. If the price of a roll of sushi is $8 and the price per piece of sashimi is $2, did Eric maximize his utility? Explain.
9. For most consumers, maximizing utility through consumption generally means finding good deals in order to maximize the utility received for each dollar spent. However, some makers of luxury goods believe that their customers actually achieve utility by paying high prices, such that lowering prices may lead to reduced sales. How is this counterintuitive view rationalized in our analysis of consumer behavior and the utility-maximizing rule?
10. Advertisements on television both inform consumers and persuade them to purchase products in differing proportions, depending on the ad. But today, because digital video recorders can be found in virtually all households, much of what these households watch is recorded, and the vast bulk of the ads are skipped. If this trend continues, where will consumers find out about new products?
11. An organization holding a charity event sold raffle tickets for 50% off last week. This week, it changed the offer: Instead of discounting tickets, it offered buyers a 60% bonus (e.g., for every 10 tickets purchased, buyers get 6 more tickets free). If raffle tickets normally sell for $10 each and a person wishes to buy $100 in raffle tickets, is the 60% bonus offer better? Why or why not?
12. A common practice at many supermarkets is to show the customer’s total “savings” on their purchase at the bottom of the receipt. Such savings include the total discounts from goods purchased along with savings from coupons used. How would listing the total savings on a receipt influence an individual’s consumption habits? Of what type of behavioral factor does this strategy take advantage?
In the News
13. In today’s technology-driven society, individuals are often multitasking with the help of mobile devices, with the objective of increasing productivity by always being “connected.” However, countering this belief is a growing interest in the role of mindfulness, which is defined as being attentive to one’s experiences in the present moment (Time, “The Mindful Revolution,” January 23, 2014). Adherents of mindfulness believe that one should limit activities (such as the constant checking of messages) that may appear productive but actually are counterproductive. In fact, Google has taken this one step further by promoting one of its lead engineers, Chade-Meng Tan, to the official title of “Jolly Good Fellow (which nobody can deny).” Mr. Tan’s well-paid job is to help Google’s employees be more mindful. Discuss how Google’s decision to have a Jolly Good Fellow on its payroll might affect consumers of Google’s products despite not directly producing any goods or services.
14. In a New York Times article by economist Richard Thaler (“The Power of Nudges, for Good and Bad,” October 31, 2015), nudging is described as strategies that encourage consumers to buy products that they might otherwise not consider. It points to a common practice among online newspapers to restrict access to articles without an online subscription, but then offering a free one-month trial to facilitate access. This free trial then turns into an automatic renewal at the regular price that consumers must then call to cancel. How might the practice of nudging be harmful to consumers attempting to maximize utility? Provide an example of how nudging by a corporation or other organization might lead to a good outcome for society.
Solving Problems
15. Assume a consumer has $40 to spend and for both products the marginal utilities are shown in the following table:
|
Quantity |
MUA |
MUB |
|
1 |
35 |
80 |
|
2 |
20 |
40 |
|
3 |
12 |
18 |
Assume that each product sells for $10 per unit.
a How many units of each product will the consumer purchase?
b Assume the price of product B rises to $20 per unit. How will this consumer allocate her budget now?
c If the prices of both products rise to $20 per unit, what will be the budget allocation?
WORK IT OUT
16. Answer the questions following the table.
|
First-Run Movies |
Bottles of Wine |
||||
|
Quantity |
Total Utility |
Marginal Utility |
Quantity |
Total Utility |
Marginal Utility |
|
0 |
0 |
— |
0 |
0 |
— |
|
1 |
140 |
_______ |
1 |
180 |
_______ |
|
2 |
260 |
_______ |
2 |
340 |
_______ |
|
3 |
360 |
_______ |
3 |
460 |
_______ |
|
4 |
440 |
_______ |
4 |
510 |
_______ |
|
5 |
500 |
_______ |
5 |
540 |
_______ |
|
|
|
|
|
|
|
a Complete the table.
b Assume that you have $50 a month to devote to entertainment (column labeled First-Run Movies) and wine with dinner (column labeled Bottles of Wine). What will be your equilibrium allocation if the price to see a movie is $10 and a bottle of wine costs $10 as well?
c A grape glut in California results in Napa Valley wine dropping in price to $5 per bottle, and you view this wine as a perfect substitute for what you were drinking earlier. Now what will be your equilibrium allocation between movies and wine?
d Given these data, calculate your elasticity of demand for wine when the price fell from $10 to $5 (see the midpoint method in Chapter 5).
USING THE NUMBERS – USE BY THE NUMBERS ATTACHED
17. Using By the Numbers, list the top five categories on which the average U.S. household spent their incomes in the year 2014 (start with the largest expenditure and proceed downward in terms of percentage of household budget).
18. According to By the Numbers, what category or categories of goods and services have increased in price (on average) every year from 2012 to 2014? What category or categories have fallen in price every year from 2012 to 2014?
Chapter 6 – APPENDIX QUESTIONS – USE APPENDIX ATTCHMENT FOR THE NUMBERS
APPENDIX QUESTIONS AND PROBLEMS
1. Indifference curves cannot intersect. Why not?
2. Explain why the following bundles of apples (A) and bananas (B) cannot be on the same indifference curve: (4A, 2B); (1A, 5B); (4A, 3B).
3. Answer the following questions using the figure below:
a. Assume that you have $50 a month to devote to entertainment (First-Run Movies) and wine with dinner (Bottles of Wine). What will be your equilibrium allocation if the price to see a movie or buy a bottle of wine is $10? Graph the equilibrium on the figure and label it point a.
b. A grape glut in California results in Napa Valley wine dropping in price to $5 a bottle, and you view this wine as a perfect substitute for what you were drinking. Now what will be your equilibrium allocation between movies and wine? Graph that on the figure and label the new equilibrium as point b.
4. Some economists have suggested that terrorists are not spurred by poverty, but rather are educated individuals who live in countries with a lack of civil liberties. As such, terrorists are rational actors who maximize a set of goals subject to constrained resources.
Assume that terrorists can choose between nonviolent acts and violent acts. Draw a budget line and indifference curves that show where a utility-maximizing combination of these activities would occur. Now suppose that the U.S. government can choose between two types of antiterrorism policies: (1) a defensive approach such as increased airport screenings, and (2) a proactive approach, which includes activities such as infiltrating terrorist cells and freezing bank assets. Analyze how these policies affect the budget line of terrorists and how it affects the utility-maximizing combination of terrorist activities.