ANSWER, THE FOLLOWING QUESTIONS.

[) Find the slope of the budget line and call this the marginal opportunity cost of bread in terms of cheese. This is the amount of cheese Lisa is able to trade to get an addition unit of bread (rate at which she is able to exchange cheese for bread). g) Set the marginal opportunity cost equal to the marginal rate of substitution to solve for Lisa's utility maximizing consumption bundle. Label the point on the graph and the corresponding optimal consumption bundles on the appropriate axis. h) Find Lisa's utility at the optimal bundle by substituting the bundle back into the utility function [1]. Put a star on the utility maximizing IC. i) Comparative Statics: Suppose that there is a cheese monopoly and the Competition Bureau decides to regulate by putting a cap on the price of cheese which falls to 1.5 S/unit. Illustrate what happens to the budget line and the new optimal bundle. Plot the new IC accurately but you may simply sketch the new optimal IC. No calculation is needed although you may wish to do this for extra practice. Write a short paragraph to explain what happens. Please be concise but complete. i) Give your graphs and the table meaningful titles. 2) Suppose that you are sick and must take pills in a fixed proportion to feel better such that you must always take 2 blue pills (represented by x) with I red pill (represented by y). Suppose that if you take the wrong ratio, you become very ill. Assume that you are cash constrained such that within the region of your budget and a bit higher, more of both pills increases your utility, but only if they are in the correct ratio. If you buy extra pills, you may choose not to cat them but suppose they expire at the end of the week so you have to throw out any that you don't take. a) Sketch a series of indifference curves (ICs) in (x, y) space on Fig. 2 (next page). You will need to choose your axis scale and may want to use pencil initially (but may want to go over in pen). You may want to make a table to help you plot as in Question 1. b) Design a utility function of the form U(x,y) = min(ax,by) where a and b are constants. c) Suppose that the price of blue pills is $1/pill and the price of red pills is also $1/pill and you have a budget of $15 to spend on pills/week. Write down an equation for your budget line and plot it on your graph. d) Label the utility maximizing consumption levels of cach pill. No calculation required. Briefly explain your answer. c) Use the slope of the IC to find the MRS (how many y-goods you are willing to substitute to get an additional x-good) at 3 representative points on the utility maximizing IC. f) Is this an example of perfect substitutes or perfect complements?9. Which of the following statements is CORRECT? The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public. b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public. C. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In that case, the company is said to have "left money on the table." It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell. 10. Bauer Software's current balance sheet shows total common equity of $5.125,000. The company has 490,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ? a. $18.57 b. $19.09 C. $20.28 d. $17.04 e. $18.23 1 1. Emery Mining Inc. recently reported $167,500 of sales, $75.500 of operating costs other than depreciation, and $10,200 of depreciation. The company had $16,500 of outstanding bonds that carry a 7.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes. a. $44,533.57 b. $50,296.74 C. $64,442.70 d. $57,107.76 e. $52,392.44 12. During 2008, Bascom Bakery paid out $33.525 of common dividends. It ended the year with $155,000 of retained earnings versus the prior year's retained earnings of $159.600. How much net income did the firm carn during the year? a. $23.719 b. $28.057 C. $24,008 d. $28.925 e. $27.768Exercise 1 Horizontal differentiation There are only two shops selling sweet-and-sour soup in this area. For sim- plicity, we set their marginal cost of production to zero. As it happens, one shop (named "Won-Ton" and indexed by 1) is located at point 0, while the other shop (named "Too-Chow" and indexed by 2) is located at point 1. Everyday, each inhabitant of the street may consume at most one bowl of sweet-and-sour soup, bought either from Won-Ton or from Too-Chow. The price per bowl of the two shops are respectively denoted by p, and p2. The net utility for a consumer located at r on the interva I[0, 1] is given by r - n(J) - PI if consumer buys at Won-Ton r - 72(1 - x) - p2 if consumer buys at Too-Chow if consumer does not buy. where it is assumed that r is large enough so that every consumer buys one bowl of soup. 1. Before 1993 and the installation of the Mid-Levels escalators, walking up the street was much more painful than walking down. This is translated by the following assumptions: 7(x) = tr and 72(1 - x) = ( + r)(1 -r) with t, 7 > 0. 1.1 Derive the identity of the consumer who is indifferent between the two shops. 1.2 Compute the equilibrium prices and profits of the two shops. 1.3 Show that Too-Chow's profits increase if walking up the street be- comes more costly for consumers, that is if 7 increases (e.g., because the temperature has risen). Explain the intuition behind this result. 2 After 1993, the Mid-Levels escalators made going up and down equally painful for consumers. However, consumers had to pay a fixed fee f (in- dependent of distance) to use the escalators. This is translated by the following assumptions: n(x) = tr and 72(1-x) = t(1-x) + f with f >0. 2.1 Derive the identity of the consumer who is indifferent between the two shops.11. Assume quantities must be integers. The following table gives your demand for slices of pizza. $10 $7 $5 $3 $1 1 2 w 4 The only pizzeria in town charges a per-person admission fee of $20, and then allows you to purchase as many slices as you want at $2 each. How many slices do you eat? a) 5. b) 4. 3. d) 2. e) None of the above. 12. Rahul's demand for coffee is given in the following table. $2.75 $1.75 $1.25 $0.75 $0.25 2 3 4 5 If he purchases coffee, he pays $3 for the first cup, and $1 for each additional cup. What is Rahul's consumer surplus from coffee? a) $0.00. b) $0.75. c) $1.00. d) $2.75. e) $3.75. 13. Refer to the table below, where MWTP is Marginal Willingness To Pay. Q 1 2 3 4 5 6 7 MWTP (Demand) $18 $14 $12 $10 $8 $6 $4 MC $1 $3 $5 $7 $9 $11 $13 If the government implements an $1 1 price floor, what is the largest possible producer surplus? a) $11. b) $24. c) $30. d) $35. e) None of the above