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Lecture 6

ECO100Y5 Lecture 6: Review for Midterm
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Department
Economics
Course Code
ECO100Y5
Professor
Lee Bailey

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ECO100 – Lecture 6 – Test review Iclicker questions 1. Utility is U=XY. Income is m = 4, px = 4, py = 2. Costco offers members a discounted px = 1, but charges a membership fee. What is the most you would pay to join Costco  ½ = x , 1 = y, HAIC: Fee = M – Cost b,  Ub = Uz.  U = xy , MRS(slope) = y/x,  z: y/x = 4/2  Y = zx  4x+2y = 4,  U(1/2x1) = ½  b: xy=1/2: ZY = X} y=1/2 x=1 Cost = $2 a. Less than $2 b. $2 – is the correct answer c. $3 d. $4 e. More than $4 2. Utility is U = x + y. The goods are perfect substitutes. Indifference curves are linear with mrs = 1. Income is m=6, px = 3, py = 2. What is the most you would pay to join a club selling good X at px = 1? Formulas: HAIC: Fee=M-Cost b Ub=Uz  I = xy  Mrs = ocost o 1 = 3/2 o X = 6/2 o Y = 6/3  Px:ocost 1/2 o Means youll be spending all your money on good x o Cost : x =3 o Px =1 A. Less than $2 B. $2 C. $3 = the answer D. $4 E. More than $4 3. Utility is U=x^2 + y^2. Good x is crack cocaine. Good y is food. Indifference curves are concave. Income is m=6, px = 6, py=3/ CrackCo offers members a discounted px=1, but charges a membership fee. What is the most you would pay to join Crackco? HAIC: Fee = M – Cost B Ub = Uz  To find point A: use HAIC formula o A = 2 o U = 36  Point B o Uz=4=UB o Px = 1; X=2 o M = 6 o Therefore the most you would be
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