Questions:
1. Give some examples of possible Giffen goods (you might have to do some research on the internet or in some books) and explain whether their existence makes sense to you.
2. Mark has preferences represented by a utility function U(x1, x2) = x11/3x22/3. The prices of x1 (cookies) and x2 (soda) are p1 and p2, respectively. Income is equal to Y. Answer the following: Tell the answer and give the explanation!
(a) What kind of utility does Mark have? Write Mark's budget constraint and an equality
you can use to find Mark's optimal demand choice for cookies and soda.
(b) Derive Mark's demand function for cookies. Is it a normal or an inferior good?
3. Mary's utility function is U(b,c)=b +100c - c2 where b is the number of silver bells in her garden and c is the number of cockle shells. She has 500 square feet in her garden to allocate between silver bells and cockle shells. Silver bells each take up 1 square foot and cockle shells each take up 4 square feet. She gets both kinds of seeds for free. Tell the answer and give the explanation!
a) To maximize her utility, given the size of her garden, Mary should plant _____ silver bells and _____ cockle shells. (write down the budget constraint for space. Solve the problem as if it were an ordinary demand problem)
b) If she suddenly acquires an extra 100 square feet for her garden, how much should she increase her planting of silver bells? How much should she increase her planting of cockle shells?
c) If Mary had only 144 square feet in her garden, how many cockle shells would she grow?
d) If Mary grows both silver bells and cockle shells, then we know that the number of
square feet in her garden must be greater than _______
4. Multiple Choice (Tell the answer and give the explanation!)
1) If there are two goods and if income doubles, and the price of good 1 doubles, while the price of good 2 stays constant:
(a) a consumer's demand for good 1 will increase only if it is a Giffen good for her.
(b) a consumer's demand for good 2 will decrease only if it is a Giffen good for her.
(c) a consumer's demand for good 2 will increase only if it is an inferior good for her.
(d) a consumer's demand for good 2 will decrease only if it is an inferior good for her.
(e) None of the above.
(f) Are you talking to me?
2) John started to work in the year 2000, back then his weekly salary was $650, used to consume more than $50 of those dollars in orange juice at a price of $5 a quart. Now he makes more than $1000 per week and spends around $40 in orange juice at a price of $5 per quart.
a) For John, orange juice is a Giffen Good.
b) For John, as for anyone like him, orange juice is a normal good.
c) For John, orange juice has become an inferior good.
d) We know he mostly drinks Red Bull these days, which could explain it, even if
orange juice is a normal good.
e) If it is an inferior good for him it is an inferior good for everyone else