1) Angela has a monthly income of $120, which she spends on MP3s and a composite good whose price is $1. Currently she doesn't belong to any MP3 club so she pays the retail price of an MP3 of $2; her optimal basket includes 20 MP3s monthly. Asteroid has now introduced an "economy club"; to join, Angela would need to pay a membership fee of $30/month but then could buy all the MP3s she wants at a price of $1.
Will Angela surely want to join the economy club? If she were to join the club, how many MP3s per month might she buy? Show how you arrive at your answers using a revealed preference argument.
2) In a certain city Consolidated Power sells electricity to each citizen with a pricing scheme designed to discourage use of large amounts of power. A consumer can buy the first 5 units each month at a price of $10 per unit, and then the consumer must pay $20 for each unit beyond the first 5 units. For example, if a consumer buys 12 units, her total electricity bill will be $10(5) + $20(12-5) = $190.
Suppose a consumer has the utility function U(E,Y) = EY, where E is the number of units of electricity and Y the number of
1) Angela has a monthly income of $120, which she spends on MP3s and a composite good whose price is $1. Currently she doesn't belong to any MP3 club so she pays the retail price of an MP3 of $2; her optimal basket includes 20 MP3s monthly. Asteroid has now introduced an "economy club"; to join, Angela would need to pay a membership fee of $30/month but then could buy all the MP3s she wants at a price of $1.
Will Angela surely want to join the economy club? If she were to join the club, how many MP3s per month might she buy? Show how you arrive at your answers using a revealed preference argument.
2) In a certain city Consolidated Power sells electricity to each citizen with a pricing scheme designed to discourage use of large amounts of power. A consumer can buy the first 5 units each month at a price of $10 per unit, and then the consumer must pay $20 for each unit beyond the first 5 units. For example, if a consumer buys 12 units, her total electricity bill will be $10(5) + $20(12-5) = $190.
Suppose a consumer has the utility function U(E,Y) = EY, where E is the number of units of electricity and Y the number of
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Related questions
Problem
#1 ( Budget Lines) :
Suppose that Russ has budgeted $20 a month to buy candy bars, music downloads, or
some combination of each. If Russ buys only candy bars he can obtain 40 bars a month; if
he buys only downloads, he can buy 20 a month.
1. What is the price of a candy bar?
2. What is the price of a music download?
3. What is the opportunity cost of a music download?
4. What is the opportunity cost of a candy bar?
5. Would the opportunity cost of each good change if Russ decided to increase his
monthly budget to $30 for the two items?
Problem #2 ( Production Possibilities ):
Suppose that a nation's production possibilities can be represented by the table below:
Production Alternatives
| Product Alternatives | |||||
| Products | A | B | C | D | E |
| Food | 0 | 4 | 8 | 12 | 16 |
| Clothing | 20 | 18 | 14 | 8 | 0 |
Products A B C D E
Food 0 4 8 12 16
Clothing 20 18 14 8 0
1. What is the maximum amount of food this economy can produce? How much clothing
can it produce at this point?
2. If the economy is producing at alternative C, what is the cost of one more unit of
food?
3. If the economy is producing at alternative C, what is the cost of one more unit of
clothing?
4. Is this economy subject to the law of increasing opportunity costs? How can you tell?
5. Suppose the economy is currently producing 4 units of food and 16 units of clothing.
Is this economy producing efficiently?
