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microeconomics principles applications

Questions and Answers of Microeconomics Principles Applications

4.5 During his first year at school, Guojun buys eight new college textbooks at a cost of $50 each.Used books cost $30 each. When the bookstore announces a 20% price increase in new texts and a 10%
4.4 The Economist magazine publishes the Big Mac Index, which is based on the price of a Big Mac at McDonald’s in various countries over time. Under what circumstances would people find this index
4.3 Ann’s only income is her annual college scholarship, which she spends exclusively on gallons of ice cream and books. Last year, when ice cream cost$10 and used books cost $20, Ann spent her $250
4.2 Jean views coffee and cream as perfect complements.In the first year, Jean picks an optimal bundle of coffee and cream, e1. In the second year, inflation occurs, the prices of coffee and cream
*4.1 Alix consumes only coffee and coffee cake and only consumes them together (they are perfect complements). If we calculate a CPI using only these two goods, by how much will this CPI differ from
3.12 Sylvan’s utility function is U(q1, q2) = q1 + 2q2.Derive his compensated (Hicksian) demand and expenditure functions. M 4. Cost-of-Living Adjustment
3.11 Bill’s utility function is U = 0.5 ln q1 + 0.5 ln q2.What is his compensated demand function for q1?(Hint: See Solved Problem 4.7.) M
*3.10 Sylvia’s utility function is U(q1, q2) = min(q1, jq2).Derive her compensated (Hicksian) demand and expenditure functions. M
3.9 Remy views ice cream and fudge sauce as perfect complements. Is it possible that either of these goods or both of them are Giffen goods? (Hint: See Solved Problem 4.6.)
*3.8 Philip’s quasilinear utility function is U = 4q1 0.5 + q2.His budget for these goods is Y = 10. Originally, the prices are p1 = p2 = 1. However, the price of the first good rises to p1 = 2.
3.7 Lucy views Bayer aspirin and Tylenol as perfect substitutes. Initially the aspirin is cheaper. However, a price increase makes aspirin more expensive than Tylenol. Show the substitution, income,
*3.6 Draw a figure to illustrate the answer given in Solved Problem 4.5. Use math and a figure to show whether applying an ad valorem tax rather than a specific tax changes the analysis. M
3.5 In addition to the value-added tax, excise duties are levied on cigarettes sold in the European Union (EU).The minimum rate of excise duty in each member state must consist of both a specific
3.4 Consider two normal goods that are imperfect substitutes. Draw a diagram with good 1 on the horizontal axis to illustrate the effect of a decrease in the price of good 1 on the consumption of
3.3 Pat eats eggs and toast for breakfast and insists on having three pieces of toast for every two eggs he eats. Derive his utility function. If the price of eggs increases but we compensate Pat to
*3.2 Chen spends her money on rice and tickets to watch table tennis games. Rice is an inferior good for Chen.Does she view table tennis tickets as an inferior or a normal good? Why? In a diagram,
3.1 Under what conditions does the income effect reinforce the substitution effect? Under what conditions does it have an offsetting effect? If the income effect more than offsets the substitution
2.7 Sally’s utility function is U(q1, q2) = 4q1 0.5 + q2.Derive her Engel curves. M 3. Effects of a Price Increase
2.6 Ryan has a constant elasticity of substitution utility function U = q1ρ + q2ρ.a. What is his income elasticity for q1? (Hint: See Solved Problem 4.2.)b. Derive his Engel curve for q1. M
2.5 Derive the income elasticity of demand for individuals with (a) Cobb-Douglas, (b) perfect substitutes, and (c) perfect complements utility functions. M
*2.4 Given the estimated Cobb-Douglas utility function in Exercise 1.7, U = q1 0.6q2 0.4, for CDs, q1, and DVDs, q2, derive a typical consumer’s Engel curve for movie DVDs. Illustrate in a figure. M
2.3 According to the U.S. Consumer Expenditure Survey for 2014, Americans with the lowest 20% of incomes spend 41% of their income on housing. What are the limits on their income elasticities of
*2.2 Guerdon always puts half a sliced banana, q1, on his bowl of cereal, q2—the two goods are perfect complements. What is his utility function? Derive his demand curve for bananas graphically and
2.1 Suppose that your parents give you 2 cents in bequests for every extra euro of expected lifetime income they receive. Illustrate how an increase in your parents’income would affect how they
*1.7 If a consumer’s preferences for two goods, q1 and q2, are represented by the utility function U = q1 0.6q2 0.4, what does her/his price-consumption curve look like if the price of good 1, p1,
1.6 Draw a figure to illustrate the Application “Smoking Versus Eating and Phoning.” That is, show why as the price of cell phones drops, less tobacco is consumed. (Hint: Draw a figure like panel
1.5 If Philip’s utility function is U = 2q1 0.5 + q2, what are his demand functions for the two goods? M
1.4 David consumes two things: gasoline (G)and bread (B). David’s utility function is U(q1, q2) = 10q1 0.25q2 0.75.a. Derive David’s demand curve for gasoline.b. If the price of gasoline rises,
1.3 Derive Ryan’s demand curve for q1, given his utility function is U = q1ρ + q2ρ. M
1.2 How would your answer to Question 1.1 change if U = ln(q1 + q2), so that consumers have diminishing marginal utility of diamonds? M
1.1 Manufactured diamonds have become as big and virtually indistinguishable from the best natural diamonds (Hemali Chhapia Shah, “Pick Your Diamond, Get It Lab-Baked,” Times of India, April 28,
6.5 There have been claims over the past few years that online sales of goods to consumers in the European Union (EU) have been made without proper amount of value-added tax being paid. The EU
6.4 Salvo and Huse (2012) found that roughly one-fifth of flexible-fuel (cars that can run on a mix of ethanol and gasoline) car owners choose gasoline when the price of gas is 20% above that of
6.3 Einav et al. (2012) found that people who live in high sales tax locations are much more likely than other consumers to purchase goods over the Internet because Internet purchases are generally
*6.2 Why might governments not wish to charge rates of tax on the sale of goods and services that are significantly different from tax rates charged by jurisdictions with which they share a border if
6.1 Suppose the Challenge Solution were changed so that Max and Bob still have identical tastes, but have the usual-shaped indifference curves. Use a figure to discuss how the different slopes of
5.2 Why would a consumer’s demand for a supermarket product change when the product price is quoted inclusive of taxes rather than before tax? Is the same effect as likely for people buying a car?
5.1 Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90°. Suppose that the prices change, so the slope of the budget line through the
4.18 Given that Kip’s utility function is U(qc, qm) = qc 0.5 + qm 0.5, what is his expenditure function? (Hint: See Solved Problem 3.8.) M
4.17 Wolf’s utility function is U = aq1 0.5 + q2. For given prices and income, show how whether he has an interior or corner solution depends ona. M
4.16 Ann’s utility function is U = q1q2/(q1 + q2). Solve for her optimal values of q1 and q2 as a function of p1, p2, and Y. M
*4.14 David’s utility function is U = q1 + 2q2. Describe his optimal bundle in terms of the prices of q1 and q2. M*4.15 Vasco likes spare ribs, q1, and fried chicken, q2. His utility function is U
4.13 According to a 2010 survey of British students(http://www.leedsuniversityunion.org.uk/helpandadvice/money/costofliving), a typical student had a budget of £18.8 per week to spend on mobile
4.12 Suppose that a consumer has a Cobb-Douglas utility function and buys two goods, q1 and q2, with income of 200 euros per week. She/he spends 60 euros per week on good 1 and 140 euros per unit on
4.11 Diogo’s utility function is U(q1, q2) = q1 0.75q2 0.25, where q1 is chocolate candy and q2 is slices of pie. If the price of a chocolate bar, p1, is $1, the price of a slice of pie, p2, is $2,
4.10 A function f(X, Y) is homogeneous of degreeγ if, when we multiply each argument by a constant α, f(αX, αY) = αγf(X, Y). Thus, if a function is homogeneous of degree zero(γ = 0), f(αX,
4.9 The Application “Indifference Curves Between Food and Clothing” postulates that minimum levels of food and clothing are necessary to support life. Suppose that the amount of food one has is
4.8 For the utility function U(q1, q2) = q1ρ + q2ρ, solve for the optimal q1 and q2 as functions of the prices, p1 and p2, and income, Y. (Hint: See Solved Problem 3.5.) M
4.7 Use indifference curve–budget line diagrams to illustrate the results in Table 3.2 for each of these utility functions.
4.6 Helen views raspberries and blackberries as perfect complements. Initially, she buys five pints of each this month. Suppose that the price of raspberries falls while the price of blackberries
4.5 Taxes are often imposed on goods imported from foreign countries. Such “tariffs or custom duties”raise revenue and, by increasing the relative price of foreign goods, protect domestic
4.4 Mark consumes only cookies and books. At his current consumption bundle, his marginal utility from books is 10 and from cookies is 5. Each book costs$10, and each cookie costs $2. Is he
*4.3 Andy purchases only two goods, apples (q1) and kumquats (q2). He has an income of $40 and can buy apples at $2 per pound and kumquats at $4 per pound. His utility function is U(q1, q2) = 3q1 +
4.2 Elise consumes cans of anchovies, q1, and boxes of biscuits, q2. Each of her indifference curves reflects strictly diminishing marginal rates of substitution.Where q1 = 2 and q2 = 2, her marginal
4.1 Suppose that Polish consumers pay twice as much for oranges as they pay for apples, whereas Spanish consumers pay half as much for oranges as they pay for apples. Assuming that consumers maximize
*3.3 Governments frequently limit how much of a good a consumer can buy. During emergencies, governments may ration “essential” goods such as water, food, and gasoline rather than let their
3.2 What happens to a consumer’s optimal choice of goods if all prices and the consumer’s income double? (Hint: What happens to the intercepts of the budget constraint?)
3.1 What is the effect of a 50% income tax on Dale’s budget line and opportunity set?
2.8 Phil’s quasilinear utility function is U(q1, q2) =ln q1 + q2. Show that his MRS is the same on all of his indifference curves at a given q1. (Hint: Look at Solved Problem 3.3.) M
2.7 If José Maria’s utility function is U(q1, q2) = q1 +Aq1 aq2 b + q2, what is his marginal utility from q2? What is his marginal rate of substitution between these two goods? (Hint: Look at
*2.6 What is the MRS for the CES utility function(which is slightly different from the one in the text)U(q1, q2) = (aq1ρ + [1 - a]q2ρ)1/ρ? (Hint: Look at Solved Problem 3.2.) M
*2.5 Suppose we calculate the MRS at a particular bundle for a consumer whose utility function is U(q1, q2). If we use a positive monotonic transformation, F, to obtain a new utility function, V(q1,
*2.4 Tiffany’s constant elasticity of substitution (CES)utility function is U(q1, q2) = (q1ρ + q2ρ)1/ρ. What is the positive monotonic transformation such that Tiffany’s utility function is
2.3 Fiona requires a minimum level of consumption, a threshold, to derive additional utility: U(X, Z)is 0 if X + Z … 5 and is X + Z otherwise. Draw Fiona’s indifference curves. Which of our
2.2 Sofia will eat one skewer of souvlaki only with one unit of tzatziki sauce. Show her preference map.What is her utility function?
2.1 Giovanni considers tickets to operas at Teatro alla Scala in Milan and to football matches played by the Italian national football team to be perfect substitutes. Show his preference map. What is
*1.5 Arthur spends his income on bread and chocolate.He views chocolate as a good but is neutral about bread, in that he doesn’t care if he consumes it or not. Draw his indifference map.
1.4 Don is altruistic. Show the possible shape of his indifference curves between charitable contributions and all other goods. Does this indifference curve violate any of our assumptions? Why or why
1.3 Give as many reasons as you can why we believe that indifference curves are convex and explain.
1.2 Can an indifference curve be downward sloping in one section, but then bend backward so that it forms a “hook” at the end of the indifference curve? (Hint:Look at Solved Problem 3.1.)
1.1 Explain why economists assume that the more-isbetter property holds and describe how these explanations relate to the results in the Application “You Can’t Have Too Much Money.”
*9.2 When a disease like bovine spongiform encephalopathy (mad cow disease) is found, export markets for a country’s beef products close down and domestic sales of beef products plummet. How would
9.1 In the Challenge Solution, we could predict the change in the equilibrium price of crops but not the quantity when firms start selling GM seeds.For what shape supply and demand curves (or for
8.1 Are predictions using the supply-and-demand model likely to be reliable in each of the following markets?Why or why not?a. Applesb. Convenience storesc. Electronic games (a market dominated by
*7.4 An increase in the minimum wage could raise the total wage payment, W = wL(w), where w is the minimum wage and L(w) is the demand function for labor, despite the fall in demand for labor
*7.3 Usury laws place a ceiling on interest rates that lenders such as banks can charge borrowers. Lowincome households in states with usury laws have significantly lower levels of consumer credit
7.2 The Thai government actively intervenes in markets(Nophakhun Limsamarnphun, “Govt Imposes Price Controls in Response to Complaints,” The Nation, May 12, 2012).a. The government increased the
7.1 Severe disruptions to the supply of petroleum caused by international events or natural disasters can result in sharp spikes in prices within an economy for petroleum products such as gasoline.
6.10 The estimated demand function for coffee is Q = 12 - p (Equation 2.3), and the estimated supply function is Q = 9 + 0.5p (Equation 2.7).a. Write equations for the equilibrium price and quantity
6.9 The United Kingdom has a drinking problem. British per-capita consumption of alcohol rose 19%between 1980 and 2007, compared with a 13%decline in other developed countries. Worried about
*6.8 Use calculus to show that the less elastic the demand curve, an increase in a specific sales tax t reduces quantity less and tax revenue more. (Hint: The quantity demanded depends on its price,
6.7 Canada provided a 35% subsidy of the wage of video game manufacturers’ employees in 2011.a. What is the effect of a wage subsidy of the equilibrium wage and quantity of workers?b. What happens
6.6 Figure 2.12 shows the effects of a specific tax of$2.40 per unit on equilibrium price and quantity.What is the equation of demand curve, D1, and supply curve, S1? A subsidy is a negative tax. If
6.5 Green et al. (2005) estimated that for almonds, the demand elasticity was -0.47 and the long-run supply elasticity was 12.0. The corresponding elasticities were -0.68 and 0.73 for cotton and
*6.4 Do you care whether a 15¢ tax per gallon of milk is collected from milk producers or from consumers at the store? Why or why not?
6.3 If a tax is introduced and the full burden or incidence of the tax is borne by producers, what can we say about the shape of the market supply and demand curves, or the demand and supply
6.2 If a tax is introduced and the full burden or incidence of the tax is borne by consumers, what can we say about the shape of the market supply and demand curves, or the demand and supply
6.1 What effect does a $1 specific tax have on equilibrium price and quantity, and what is the incidence on consumers, if the following is true:a. The demand curve is perfectly inelastic.b. The
5.9 Show that the supply elasticity of a linear supply curve that cuts the price axis is greater than 1 (elastic), and the coefficient of elasticity of any linear supply curve that cuts the quantity
*5.8 Calculate the price and cross-price elasticities of demand for coconut oil. The coconut oil demand function (Buschena and Perloff, 1991) is Q = 1,200 - 9.5p + 16.2pp + 0.2Y, where Q is the
5.7 In a commentary piece on the rising cost of health insurance (“Healthy, Wealthy, and Wise,” Wall Street Journal, May 4, 2004, A20), economists John Cogan, Glenn Hubbard, and Daniel Kessler
5.6 The World Health Organization has found that youth are more responsive than adults to tobacco tax increases (http://www.who.int/tobacco/economics/meetings/dublin_demand_for_tob_feb2012.pdf). If a
5.5 According to Borjas (2003), immigration to the United States increased the labor supply of working men by 11.0% from 1980 to 2000, and reduced the wage of the average native worker by 3.2%. From
5.4 When a disease like bovine spongiform encephalopathy (mad cow disease) is found, export markets for a country’s beef products close down so that the supply for the domestic market increases in
5.3 Based on information in the Application “The Demand Elasticities for Google Play and Apple Apps,” the demand function for mobile applications at the Apple App Store is QA = 1.4p-2 and the
5.2 Calculate the elasticity of demand, if the demand function isa. Q = 120 - 2p + 4Y, at the point where p = 10, Q = 20. (Hint: See Solved Problem 2.2.)b. Q = 10p-2. (Hint: See Solved Problem 2.3.) M
5.1 According to the World Health Organization, the number of countries with tax shares representing more than 75% of the retail price of the most popular brand of cigarettes increased significantly
4.8 Suppose the demand function for carpenters is Q = 100 - w, and the supply curve is Q = 10 + 2w - T, where Q is the number of carpenters, w is the wage, and T is the test score required to pass
4.7 Given the answer to Exercise 2.4, what effect does a quota of Q 7 0 have on the equilibrium in the market? (Hint: The answer depends on whether the quota binds: is low enough to affect the
4.6 DeCicca and Kenkel (2015) report that the price elasticity of demand for cigarettes is -0.4. Suppose that the daily market demand for cigarettes in New York City is Q = 20,000p-0.4 and that the

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