Problem Set 5
1. The following figure shows the relationship between income and quantity demanded for a new good, X. Based on this figure, we can conclude that
A) X is an inferior good and income elastic.
B) X is an inferior good and income inelastic.
C) X is a normal good and income elastic.
D) X is a normal good and income inelastic.
E) X is a normal good and has unit elasticity.
2. If there is an increase in the price of broccoli because of disastrous weather that destroys about half of this year's spinach crop, which of the following could be true? (We can assume the supply curve of broccoli and demand curve for spinach does not change. Let X denote the cross price elasticity of demand between the price of spinach and the quantity demanded of broccoli.)
A) The income elasticity of demand for spinach is positive while the income elasticity of demand for broccoli is negative.
B) The demand curve for broccoli has shifted to the right and X is positive.
C) The demand curve for broccoli has shifted to the left and X is positive
D) The supply curve of spinach has shift to the left and X is negative.
E) The supply curve of spinach has shift to the right and X is negative.
3. Suppose the following data is collected from Country A.
|
Year
|
CPI
|
Nominal Wages (unit/hr)
|
Real Wages (unit/hr)
|
|
1970
|
30
|
3
|
10
|
|
1980
|
60
|
6
|
10
|
|
1990
|
100
|
X
|
10
|
|
2000
|
240
|
30
|
Y
|
The values of X and Y are:
A) X=10;Y=8
B) X=12.5;Y=10
C) X=8;Y=12.5
D) X=10; Y=12.5
E) X=8; Y=10
4. Lewis had $10 dollars in his pocket. He walked into a McDonald restaurant hungry. He found this McDonald only sold Pepsi ($2/can) and Chicken Wings ($1/piece). The following tables show Lewis's total utility from consuming Pepsi and Chicken Wings respectively.
Pepsi
|
Quantity (piece)
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Total Utility
|
0
|
24
|
44
|
58
|
68
|
72
|
74
|
|
Marginal Utility
|
N/A
|
|
|
|
|
|
|
|
MU per dollar
|
N/A
|
|
|
|
|
|
|
Chicken Wings
|
Quantity (can)
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Total Utility
|
0
|
11
|
20
|
28
|
35
|
39
|
42
|
|
Marginal Utility
|
N/A
|
|
|
|
|
|
|
|
MU per dollar
|
N/A
|
|
|
|
|
|
|
a) Fill in the blanks for marginal utility and MU per dollar in both tables. What happened to the marginal utility as Lewis consumed more?
b) Describe how Lewis should spend his $10 on Pepsi and Chicken Wings in order to maximize his total utility. How many Pepsi and Chicken Wings would Lewis buy?
c) Has Lewis maximized his total utility? How much utility could Lewis get from the last unit of Pepsi he bought? How much utility would Lewis get from the last unit of Chicken Wings he bought? What's the relationship between the two numbers?
5. Suppose Tim lives in a world with only two goods, apples and bananas. Tim's income each month is $50. Apples cost $2 per pound, and bananas cost $5 per pound.
a) If Tim spends all of his income each month on apples, how many apples can he consume? If Tim spends all of his income each month on bananas, how many bananas can he consume?
b) Graph Tim's budget constraint with apples on the vertical axis, and shade in the area representing all the bundles of apples and bananas that Tim can afford.
c) What is the slope of Tim's budget constraint?
d) Suppose the price of apple went up to $5 per pound while all the other things remained unchanged, what would happen to his budget constraint? Show this on your graph. Comparing with the original budget constraint does the slope change or not?
e) Suppose Tim's income doubles while prices remained unchanged from their original level. What would happen to his budget constraint? Show this on your graph.
f) Now suppose that Tim's income doubles, but that prices also double. What would happen to his budget constraint? Explain.