Assignment
1. Tyler likes hamburgers (H) and milkshakes (M). The price of a milkshake is $1 and the price of a hamburger is $3. Tyler is spending all of his at the market basket that he is currently consuming, where is MRSHF=2.
a. Write the equation of a line that represents the budget constraint. Clearly interpret the slope.
b. Is Tyler maximizing utility at this market basket? If not, explain the adjustment that he would make to achieve the objective of maximum utility. Frame your answer is the context of marginal benefit and cost and illustrate graphically using line segments.
c. Explain the initial position within the context of marginal utility per last dollar spent on each good. Show graphically.
2. The price of a movie ticket is $10.00. At that price you choose to see 20 movies a year. The price elasticity of demand has been determined to be (in absolute value) 1.5. Unfortunately for you, movie ticket prices have increased to $15.
a. Use indifference curve analysis to show the initial utility maximization point. Label this point "A". Label the second utility maximization point "B". Be sure to determine the new utility maximization quantity and label.
b. Derive the equation of the demand curve corresponding to the utility maximization positions from part a. Label the utility maximization points "A" and "B" and the intercepts.
c. Calculate the change in consumer surplus due to the increased price of movies. What is the significance of this change in consumer surplus? In other words, what is the big deal about having more or less consumer surplus?
d. Illustrate and explain the income and substitution effect associated with this price change.
3. Chris likes scotch much more than cigars, while Angelo prefers cigars to scotch. The prices of scotch and cigars are Ps = $5 and Pc = $10. Both individuals have an income of $100. Place scotch on the horizontal axis.
a. On one graph, draw each individual's indifference curves and carefully explain how each curve represents their respective preferences for scotch.
b. At their respective utility maximization point, will their respective MRSSC be equal? Illustrate and explain your answer.
4. Suppose the income elasticity of demand for food is .50 and the price elasticity of demand (in absolute value) is .75. Suppose also that Matt spends $10,000 a year on food, that the price of food is $4 and that his income is $25,000.
a. The government decides to implement a per unit subsidy for food = $2. What is Matt's new utility max position? Illustrate graphically and include relevant numbers.
b. How much money would Matt need to receive in the form of a lump sum subsidy to achieve the SAME level of utility as received with the per-unit subsidy?
c. Illustrate this point graphically including the new utility max quantity.