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Econ 326 Intermediate Microeconomics Homework 2 (Chapters: 6,8,10,15,16)

Due: 6:00 pm on July 29, 2013

Section 1: Multiple Choices


Choose the best answer for each question: 5 1. Charlies utility function were XA XB , if apples cost 70 cents each, and if bananas cost 10 cents each, Charlies budget line would be tangent to one of his indierence curves whenever a. 5XB = 7XA . b. XB = 7XA . c.5XB = XA d. XB = 5XA . e. 70X A + 10XB = M. 2. Bandy has an income of $75 and a utility function U = 20x1 of good 2 is $1. How many units of good 1 will Bandy demand? a. 35 b. 21 c. 23 d. 25 e. 48
1 /2

+ x2 . The price of good 1 is $2 and the price

3. Miss Muett insists on consuming 2 units of whey per unit of curds. If the price of curds is $3 and the price of whey is $5, then if Miss Muetts income is m, her demand for curds will be a. 5m/3 . b. 3m. c. 3C + 5W = m. d. m/3 . e. m/13. 4. If Peter consumes (1, 400, 1, 210) and earns (900, 1, 760) and if the interest rate is 10%, the present value of his endowment is a. $2,660. b. $2,500. c. $2,610. d. $5,250. e. $6,150. 5. Harvey Habit has a utility function U (c1 , c2 ) = min {c1 , c2 }. If he had an income of $430 in period 1 and $860 in period 2,and if the interest rate were 15%, how much would Harvey choose to spend in period 1? a. $945 b. $210 c. $315 d. $1,260 e. $630 6. Patience has a utility function U (c1 , c2 ) = c1 + 0.8 c2 . , where c1 is her consumption in period 1 and c2 is her consumption in period 2. Her income in period 1 is 3 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2? a. 0.75 b. 0.13 c. 0.25 d. 0 e. 0.38 7. Charlies utility function is U = xA xB . The price of apples used to be $1 per unit, and the price of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $2.25 and the price of bananas fell to $1.75. Then in order to be able to just aord his old bundle, Charlie would have to have a daily income of a. $62.50. b. $126. c. $31.25. d. $93.75. e. $250. 8. Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units of good 2 per unit of good 1. If a consumer has an income of $300 and if the price of good 2 changes from $5 to $6, while the price of good 1 stays at $1, then the income eect of the price change a. is exactly twice as strong as the substitution eect. b. accounts for the entire change in demand. c. does not change demand for good 1. d. is 6 times as strong as the substitution eect. e. is 5 times as strong as the substitution eect. 9. Suppose every Buick owners demand for gasoline is 20 5p for p less than or equal to 4 and 0 for p > 4. Every Dodge owners demand is 15 3p for p less than or equal to 5 and 0 for p > 5. Suppose that Gas Pump, South Dakota, has 100 Buick owners and 150 Dodge owners. If the price of gasoline is $3.50, what is the total amount of gasoline demanded in Gas Pump? 1

a. 1,850 gallons b. 1,387.50 gallons c. 462.50 gallons d. 925 gallons e. None of the above. 10. The inverse demand function for grapefruit is dened by the equation p = 282 9q, where q is the number of units sold. The inverse supply function is dened by p = 7 + 2q. A tax of $22 is imposed on suppliers for each unit of grapefruit that they sell. When the tax is imposed, the quantity of grapefruit sold falls to a. 25. b. 14. c. 21. d. 23. e. 24.

Section 2: Problems Question 1


Nevilles passion is ne wine. When the prices of all other goods are xed at current levels, Nevilles demand function for highquality claret is q = .02m2p, where m is his income, p is the price of claret (in British pounds), and q is the number of bottles of claret that he demands. Nevilles income is 7,500 pounds, and the price of a bottle of suitable claret is 30 pounds. Fill in the blank in boxes. (a) How many bottles of claret will Neville buy? (b) If the price of claret rose to 40 pounds, how much income would Neville have to have in order to be exactly able to aord the amount of claret and the amount of other goods that he bought before the price change? . At this income, and a price of 40 pounds, how many bottles would Neville buy? (c) At his original income of 7,500 and a price of 40, how much claret would Neville demand? . (d) When the price of claret rose from 30 to 40, the number of bottles that Neville demanded decreased by . The substitution eect (increased, reduced) his demand by bottles and the income eect (increased, reduced) his demand by bottles.

Question 2
Here is a puzzle for you. At rst glance, it would appear that there is not nearly enough information to answer this question. But when you graph the indierence curve and think about it a little, you will see that there is a neat, easily calculated solution. (Hint: this is similar to Question 15 in Homework 1) Kinko spends all his money on whips and leather jackets. Kinkos utility function is U (x, y ) = min{4x, 2x + y }, where x is his consumption of whips and y is his consumption of leather jackets. Kinko is consuming 15 whips and 10 leather jackets. The price of whips is $10. You are to nd Kinkos income. (a) Graph the indierence curve for Kinko that passes through the point (15, 10). What is the slope of this indierence curve at (15, 10)? . (b) What must be the price of leather jackets if Kinko chooses this point? . Now, what is Kinkos income? .

Question 3
Nickleby has an income of $2,000 this year, and he expects an income of $1,100 next year. He can borrow and lend money at an interest rate of 10%. Consumption goods cost $1 per unit this year and there is no ination. . What is the future value of his endowment? . (a) What is the present value of Nicklebys endowment? In an approriate graph, show the combinations of consumption this year and consumption next year that he can aord. Label Nickelbys endowment with the letter E. (b) Suppose that Nickleby has the utility function U (C1 , C2 ) = C1 C2 . Write an expression for Nicklebys marginal rate of substitution between consumption this year and consumption next year. (Your answer will be a function of the variables C1,C2.) . (c) What is the slope of Nicklebys budget line? . Write an equation that states that the slope of Nicklebys indierence curve is equal to the slope of his budget line when the interest rate is 10%. . Also write down Nicklebys budget equation. (d) Solve these two equations. Nickleby will consume units in period 1 and units in period 2. Label this point A on your diagram. (e) Will he borrow or save in the rst period? . How much? . 2