Intermediate Micro Theory and Strategy Econ 310 Readings Chapter 5 Questions and Problems 1. Chapter 5 exercise (pg 164) 5.2 [Hint: plug into the budget line] 2. Chapter 5 exercise 5.5 [Hint: Similar to Q1 on Budget and Consumer Choice Worksheet] 3. Chapter 5 exercise 5.8 [Hint: The two goods are the regular bags and the jumbo bags put the jumbo bag on the vertical axis. Draw the budget line. Think about the shape of the indifference curves what is the trade-off between regular and jumbo bags?] 4. Chapter 5 exercise 5.12 5. Chapter 5 exercise 5.13[Hint: Assume Ps=Pb=$1] 6. Juanita consumes only food (F) and clothing (C). Her utility curve is given by: U(F,C) = 2FC a. Draw her indifference curve for a utility level of 24. Draw one for a utility level of 48. Are the indifference curves convex? Use graph paper make sure everything is to scale. Put food on the vertical axis and clothing on the horizontal axis. b. Suppose that food costs $1 per unit and clothing costs $3 per unit. If Juanita has $12 to spend on food and clothing, draw her budget constraint (use the same graph as in part a). c. What is Juanitas utility maximizing quantities of food and clothing (solve graphically)? d. What is the MRS when utility is maximized? Explain. e. Suppose that Juanita purchased 3 units of food and 3 units of clothing with her $12 budget. Would her MRS be greater than or less than your answer in part d? Explain. 7. Wayne has $38 to spend each week on doughnuts and posters. Doughnuts (D) sell for 50 cents each and posters (P) sell for $2 each. Wayne's utility function is: U= 10D+80P-D2-2P2. Thus, the MUD=10-2D and the MUP = 80-4P. a. If Wayne is currently consuming 2 doughnuts and 18.5 posters is he maximizing his utility? If not, what can do to increase his utility? Explain why. b. What combination of doughnuts and posters will maximize his utility? c. Suppose the price of posters increases to $4. Calculate the new utility-maximizing point. What happens to the individual demand curve for posters? What happens to the individual demand curve for doughnuts? Are these goods complements or substitutes? Explain. d. Suppose instead that Waynes income increases to $50 (price of posters = $2). Calculate the new utility-maximizing point. What happens to the individual demand curve for posters? What happens to the individual demand curve for doughnuts? Are these goods normal or inferior? Explain. 8. How does MRS and the ratio of the prices relate to MB and MC? Based on this relationship, explain why the MRS between two goods must equal the ratio of the prices for the consumer to achieve maximum satisfaction. 9. Using carefully-labeled graphs, explain how an individual demand curve is derived from the utility-maximizing behavior of a consumer. [Hint: You do not need to calculate anything just free draw it and use your graph as a tool to illustrate your point.] Book is microeconomics 1st edition by Bernheim and Whinston