Question
1. The utility that Meredith receives by consuming food F and clothing C is given by U(F,C) FC. Suppose that Meredith's income in 1990 is
1. The utility that Meredith receives by consuming food F and clothing C is given by U(F,C) FC.
Suppose that Meredith's income in 1990 is $1200 and that the prices of food and clothing are
$1 per unit for each. By 2000, however, the price of food has increased to $2 and the price of
clothing to $3. Let 100 represent the cost of living index for 1990. Calculate the ideal and the
Laspeyres cost-of-living index for Meredith for 2000. (Hint: Meredith will spend equal amounts
on food and clothing with these preferences.)
2. Explain the difference between each of the following terms
a) a price consumption curve and a demand curve
b) an individual demand curve and a market demand curve
c) an Engel curve and a demand curve
d) an income effect and a substitution effect
3. Tickets to a rock concert sell for $10. But at that price, the demand is substantially greater than
the available number of tickets. Is the value or marginal benefit of an additional ticket greater
than, less than, or equal to $10? How might you determine that value?
4. Which of the following combinations of goods are complements and which are substitutes? Can
they be either in different circumstances? Discuss.
a) a mathematics class and an economics class
b) tennis balls and a tennis racket
c) steak and lobster
d) a plane trip and a train trip to the same destination
e) bacon and eggs
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