1. Many health economists believe that health care in the U.S. is over-consumed and that some of the money spent on health would provide greater benefits if used for other purposes. Explain using the concept of marginal utility.
2. Individuals who buy second homes usually spend less than for their first home. Why is this true (use marginal utility analysis)?
3. A consumer receives 4 utils of satisfaction from buying one more unit of good A with a price of $1 and 6 utils of marginal utility from purchasing another unit of good B which is priced at $2. Does she maximize her utility by using her last $3 to buy one unit of each A and B? Explain.
4. Behavioral economists believe that people do not always act the way the traditional economic framework suggests they should. Which of the following examples illustrate this? (Highlight the correct examples - there are more than one)
a. Some people treat $100 they earn differently from $100 they win in a random drawing.
b. Some people value their own possessions more highly than things they don't have, even if the dollar value is the same (the "endowment effect").
c. Some people would be willing to pay money to lower the incomes of others.
d. Some people would be willing to make a large sacrifice in order to help a loved one.
5. A household has a monthly income of $100 (this is poor country). A unit of food (10,000 calories) costs $5 (Good X) and a unit of clothing costs $20 (Good Y). What are the intercepts of budget line on the indifference curve graph?
6. Explain why earning zero economic profit is not as bad as it sounds.
7. Tanya operates a home business importing sweaters from Peru and sells them from her home. She collects $400,000 in revenue a year, and spends $200,000 on the sweaters and shipping costs, as well as $25,000 on advertising, accounting services and utilities. She takes a salary of $50,000 per year but used to make $100,000 per year working for an advertising agency. Now she works out of the basement of her house, for which she doesn't have any other marketable use. She has no other expenses.
a. Tanya's accounting profit is:
b. Tanya's economic profit is:
8. Explain why the marginal product of labor will at some point decline in the short-run as more workers are hired.