Page 1 of 2 Practice Problems - Chapter 4 4.1 - Explain how the indifference curve and budget line apparatus are used to derive a consumer's demand curve. For a demand curve, certain things are held constant. What are they, and how does this approach hold them constant? 4.2 - If the per-unit price of college education mees and the prices of all other items fall, is it possible for the consumer to and up on the same indifference curve as before the price changes? If so, will the sounder be purchasing the same market basket? Support your answer with a diagram. 1.4 - Assume that Joe would like to purchase 50 gallons of gasoline monthly at a price of $2.50 per gallon. However, the $2.50 prices is a result of a goverment price ceiling, so there is a shortage, and Joe can only get 25 gallons. (a) Show what this situation looks like by using indifference curves and a budget line. bj Then, show that Joe will be willing to pay price higher than $2.50 to get additional units of gasoline. (This result is the demand-side reason for the emergence of a black market.) 4.6 - If Edie's income rises by 50% and, simultaneously, the price of automobile maintenance Increases by 50%. (a) Can we predict how Eddie's consumption of automobile maintenance will be affected? (b) Can we predict how, on average Edie's consumption of other goods will be affected? ci Use concepts of income and substitution effects to answer the question graphically. (ie. Use indifference curves and budget constraints to show the changes and label the SE [substitution effect) and IE (income effect). (d) Explain how the SE and IE lead to your answers to parts (at and (b). "In any situation where there is one named definitive good and a basket of "all other goods", place the named definitive good on the x-axis and the basket of "all other goods" on the y- axis. 4.10 - Suppose that Lorena consumes only three different goods: steak knives, butter knives, and butcher knives. If, according to Lorena's preferences, butter and butcher knives are inferior goods ,must steak knives be a normal good? Explain your answer. 4.13 - Suppose that George is interested in only 2 goods, cigars (x-axis) and scotch (y-axis). Employ the Indifference curves and budget constraints to show a case where a decrease in the price of cigars leads to an increase in George's scotch consumption. Does this imply that George considers cigars and scotch as complements? Explain your answer. 4.14 - Using the same set-up as in question 4.13, but this time assume that a decrease in the price of cigars leads to a decrease in George's scotch consumption. Does this imply that scotch is an inferior good for George? 4.19 - See parts below. (a) Define consumer surplus bj Explain how you would show it in a diagram containing a demand curve for some product. (c) What would consumer surplus equal in Figure 4.9 if the demand was perfectly elastic at the market price of 53 per espresso cup? dj Assume that the consumer's demand for espresso is such that at a price of $8 the consumer will buy 0 cups of espresso. If the consumer will buy 5 cups of espresso at the price of $3 per cup, what is the value of the consumer's: Page 2 of 2 (a) Total cost b) Total benefit ch Consumer surplus
