Chapter 5:

1. Bridget has a limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Bridget's utility, while the last pound of cheese added 40 units.

a) Is Bridget making the utility-maximizing choice? Why or why not?

b) If not, what should she do instead? Why?

2. Suppose Bill is on a low- carbohydrate diet. He can eat only three foods: Rice Krispies, cottage cheese, and popcorn. The marginal utilities for each food are tabulated below. Bill is allowed only 167 grams of carbohydrates daily. Rice Krispies, cottage cheese, and popcorn provide 25, 6, and 10 grams of carbohydrates per cup, respectively. Referring to the accompanying table, respond to the following questions:
Units of food Marginal utility Marginal utility Marginal utility
(cups/day) of Rice Krispies of cottage cheese of popcorn
1 175 72 90
2 150 66 80
3 125 60 70
4 100 54 60
5 75 48 50
6 50 36 40
7 25 30 30
8 25 18 20

a. Given that Bill can consume only 167 grams of carbohydrates daily, how many cups of each food will he consume daily? Show your work.

b. Suppose Bill's doctor tells him to further reduce his carbohydrate intake to 126 grams per day. What combination will he consume?

Chapter 6:

3. What effect, if any, does each of the following events have on the price elasticity of demand for corporate-owned jets?

a. Reduced corporate earnings lead to cuts in travel budgets and increase the share of expenditures on corporate jet travel.

b. Further deregulation of the commercial airlines industry substantially increases the variety of departure times and destinations offered by commercial airlines.

c. The cost of manufacturing corporate jets rises.

d. A new, much more fuel-efficient corporate jet is introduced.

5. U.S. cigarette makers face enormous punitive damage penalties after losing a series of class-action lawsuits that heaped penalties amounting to several hundred billion dollars on the tobacco industry. In spite of the huge penalties, The Wall Street Journal reported, "The damage (to cigarette makers) is generally under control." What action do you suppose the cigarette companies took to avoid bankruptcy? Why did this action succeed?

7. As manager of Citywide Racquet Club, you must determine the best price to charge for locker rentals. Assume that the (marginal) cost of providing lockers is 0. The monthly demand for lockers is estimated to be Q = 100 - 2P where P is the monthly rental price and Q is the number of lockers rented per month.

a. What price would you charge?

b. How many lockers are rented monthly at this price?

c. Explain why you chose this price.

8. The demand curve for haircuts at Terry Bernards Hair Design is P= 20 - 0.20Q where Q is the number of cuts per week and P is the price of a haircut. terry is considering raising her price above the current price of $15. Terry is unwilling to raise the price if the price will cause revenues to fall.

A. Should Terry raise the price of haircuts above $15. Why or Why not?

B. Suppose demand for Terry's haircuts increases to P = 40 - 0.40Q. At a price of $15, should Terry raise the price of her haircuts? Why or Why or Why not?

9. Movie attendance dropped 8 percent as ticket prices rose a little more than 5 percent. What is the price elasticity of demand for movie tickets? Could price elasticity be somewhat overestimated from these figures? That is, could other things have changed, accounting for some of the decline in attendance?

10. The Dallas Morning News reported the findings of a study by the Department Transportation that examined the effect on average airfares when new, low-priced carriers such as Southwest Airlines or Vanguard Airlines, entered on one of three city-pair markets: Baltimore-Cleveland, Kansas City, San Francisco, or Baltimore, Providence. Use the following excerpt from the newspaper article to calculate the arc elasticity of demand for each of the three city-pairs. How do the three computed elasticities compare? Based on the computed elasticities, describe travelers' responsiveness to the reductions in air fares.

a. "(In) Baltimore and Cleveland, for example,...just 12,790 people flew between those cities in the last three months of 1992, at an average fare of $233. Then Dallas based Southwest Airlines entered the market. In the last three months of 1996, 115, 040 people flew between the cities at an average far of $66."

b. "(On) the Kansas City-San Francisco connection...(during) the last quarter of 1994 some 35,690 people made the trip at an average fare of $165. Two years later, after the arrival of Vanguard Airlines, fares had dropped to an average of $107 and traffic had nearly doubled to 68,100."

c. "On the Baltimore-Providence, R.I., route, where the average fare fell form $196 to $57, ...the number of passengers carried jumped form 11,960 to 94,116."