Anna spends her grant (her only income) exclusively on ice-cream and books. Last year, when a gallon of ice-cream cost $10 and used books cost $20 each, she spent her grant of $250 on five gallons of ice-cream and ten books. This year, the price of ice-cream rose to $15 and the price of books increased to $25. So that Ann can afford the same bundle of ice-cream and books as last year, her grant was increased to $325. Will Ann buy the same bundle as last year? Why or why not? Does the increase in scholarship compensate her for the increases in ice-cream and book prices? Explain.
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Calculating inflation using a simple price index.
Consider a frictional price index, the College student price index (CSPI), based on a survey of annual purchases of a typical college student. Suppose the following table show information on the market basket for the CSPI and the prices for each good in 2012, 2013, and 2014.
Quantity in Basket | 2012 Price cost | 2013 Price cost | 2014 Price cost | |
Notebooks | 10 | 2 20 | 1 | 3 |
Calculators | 1 | 50 50 | 54 | 75 |
Large coffees | 200 | 1 200 | 1 | 1 |
Energy drinks | 100 | 2 200 | 3 | 4 |
Textbooks | 10 | 100 1000 | 120 | 150 |
Total cost | 1470 | |||
Price index | 100 |
The cost of each item in the basket and total cost of the basket are shown for 2012. Perform these same calculations for 2013 and 2014 and enter the results into the table.
Suppose the base year for this price index is 2012. Calculate and enter the value of the CSPI for the remaining years in the last row of the table.
Between 2012 and 2013, the CSPI increased by (120%, 20%, 25%, or 150%).
Between 2013 and 2014, the CSPI increased by (120%, 150%, 30%, or 25%).
Which of the following, if true, would illustrate why price indexes such as CSPI might overstate inflation in the cost of going to college?
A. As the price of energy drinks increased relative to the price of coffee 2012 and 2014, students decreased their consumption of energy drinks and increased their consumption of coffee.
B. Professors required each student to buy 10 textbooks, regardless of the price.
C. The quality of textbooks increased dramatically from 2012 to 2014, with textbook companies bundling new online study aids with their books.
Michael spends all of his income on coffee and donuts. A coffee costs $2.50 and a donut costs $2.00. At his current consumption level, the marginal utility for coffee is 30 utils, and the marginal utility for a donut is 60 utils. Which statement best describes what Michael needs to do to maximize his utility?
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Question 2
What is it called when the marginal utility derived from the last dollar spent on each good is the same across all goods and the last dollar spent uses all of the available budget for the purchase of those goods?
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Question 3 (1 point)
What does the economic theory of marginal utility infer?
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Question 4
Kate is addicted to chocolate and does not care how much it costs. In fact, she spends more than $20 a week on chocolate. What can be concluded about elasticity in her buying decisions?
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Question 5 (1 point)
Why does the demand for a good become relatively more elastic?
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Question 6 (1 point)
Assume the price of chicken per pound is $3.49 and that Americans purchase 10 million pounds per chicken every month. If the price of chicken increases to $5.49 per pound, identify what will occur to consumer surplus?
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Question 7 (1 point)
What is another name for the difference between the price that consumers are willing to pay for a good and a lower price that they may actually have to pay?
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Question 8
Adam, Brian, Robert, and Sam all want to attend a football game. The admission price is $48. Adam is willing to pay $59 for the ticket. Brian is willing to pay $39. Robert is willing to pay $45, and Sam is willing to pay $55. Based on this information, who will go to the game?
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Question 9 (1 point)
Lily is willing to pay $10 for one bracelet and $5 for a second. Patty is willing to pay $12 for one bracelet and $2 for a second. If the price is currently $8 per bracelet, identify what is the total consumer surplus after Lily and Patty make their purchases?
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Question 10 (1 point)
Manfred is willing to shovel one driveway for $25, a second for $30, and a third for $35. Assume that the market rate for shoveling driveways is $32. How many driveways will Manfred shovel, what will be his total revenue, and what will be his producer surplus?
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Question 11 (1 point)
What would the difference between the price that producers receive and the lower price at which they are willing to sell the good be called?
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Question 12 (1 point)
What will happen when there is an increase in the price of eBook downloads?
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Question 13 (1 point)
When is price elasticity of demand utilized to measure how an individual changes the quantity they demand?
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Question 14 (1 point)
Assume Mary consumes only tea and pastries. A cup of tea costs 5 euros and a pastry costs 8 euros. Her weekly income is 450 euros. Mary always drinks 2 cups of tea for every pastry she consumes. What is MaryΓ’ΒΒs optimal weekly consumption bundle?
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Question 15 (1 point)
When is producer surplus a positive value?
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