Econ 111: Principles of Economics - Accelerated Treatment - Problem Set 3
Q1. True or false? Use a graph and explain: If a consumer moves upward along an indifference curve, his or her total utility increases.
Q2. Assume that the marginal rate of substitution of woolen (W) for cotton (C) socks is MUC/MUW = 6 and that the price of cotton socks is $1 per unit, and the price of woolen socks is $3 per unit.
a) Illustrate the consumer's current position on the budget line relative to an indifference curve.
b) Explain why the consumer would like to buy more cotton socks.
Q3. Mary has a total of $80 to spend on books or movies each month and both goods must be purchased in whole (no fractional units). Movies cost $8 each, while books cost $20 each. Her preferences for movies and books are summarized by the information below:
|
Movies # per month
|
Total Util.
|
Marginal Util. (MU)
|
MU/$
|
Books # per month
|
Total Util.
|
Marginal Util. (MU)
|
MU/$
|
|
1
|
50
|
|
|
1
|
22
|
|
|
|
2
|
80
|
|
|
2
|
42
|
|
|
|
3
|
100
|
|
|
3
|
52
|
|
|
|
4
|
110
|
|
|
4
|
57
|
|
|
|
5
|
116
|
|
|
5
|
60
|
|
|
|
6
|
121
|
|
|
6
|
62
|
|
|
|
7
|
123
|
|
|
7
|
63
|
|
|
a) Fill in the figures for marginal utility and marginal utility per dollar for movies and books.
b) Are Mary's preferences consistent with the law of "diminishing marginal utility"? Explain briefly.
c) Given her budget of $80, what quantity of books and what quantity of movies will maximize Mary's level of satisfaction? Explain briefly.
d) Draw the budget constraint (with books on the horizontal axis) and identify the optimal combination of books and movies for Mary as point "A".
e) Now suppose the price of books falls to $10. Which of the columns in the table must be recalculated? Do the required recalculations.
f) After the price change, how many movies and how many books will Mary consume?
g) Draw the new budget constraint and identify the new optimal combination of books and movies as point "B".
h) If you calculated correctly, you have found that a decrease in the price of books has caused Mary to buy more movies as well as more books. How can this be? Explain!