Question 1.

Explain why a rational consumer does not spend all of her income buying only her favorite product.

Question 2.

Assume the utility Janet obtains from consuming apples is given in the table below.

Number of apples Total utility Marginal Utility

1 7 7

2 13 6

3 18 5

4 22 4

5 25 3

6 27 2

7 28 1

8 28 0

9 27 -1

10 25 -2

(a) At what point does diminishing marginal utility set in?

(b) If apples were freely given away at zero cost, how many apples would she choose to consume?

(c) If Janet is at her level of maximum utility from apple consumption, what will happen to her level of utility if she consumes an additional apple?

Question 3.

Suppose that Melissa spends recreation time and money on two leisure activities: Tennis and fishing. The cost per hour of tennis (court fees) and per hour of fishing (boat rentals) is $4. The table below shows the total utility that Melissa derives from the two activities.

Tennis Fishing

#of hours Total Utility Marginal Utility #of hours Total Utility Marginal Utility

1 20 1 31

2 39 2 58

3 57 3 79

4 74 4 94

5 89 5 101

6 102 6 102

a) Complete the columns of marginal utilities

b) Assume that Melissa has a budget of $20. To maximize her total utility, how much would she allocate her spending between the two activities? What is the resulting total utility?

c) At the end of the day, Melissa digs deep in her pocket and discovers an extra $4. If she allocates this additional spending between the two activities so as to maximize her total utility, what will be the final totals?

d) Suppose that Melissa's utility from the two activities remains unchanged the next day, when she arrives with $20 in her pocket. To her pleasure, she discovers that the hourly charge on court fees has decrease to $3. How will she allocate her expenditures in order to maximize her total utility?

columns of marginal utilities.

Question 4.

Assume the labour market is in equilibrium. Now suppose, the government imposes a price floor that is above the original equilibrium price. Explain the economic effects of the price floor? (Be sure to discuss quantity demanded and quantity supplied, you can draw a diagram as part of your answer)

Question 5

Assume the housing market is in equilibrium. Now suppose, the government imposes a price ceiling that is below the original equilibrium price. Explain the economic effects of the price ceiling? (Be sure to discuss quantity demanded and quantity supplied, you can draw a diagram as part of your answer)

Question 6

Suppose that household income in Charlottetown increases from $44,000 to $45,000 and the quantity of Baker Baked Beans rises from 90 to 94 cases per week.

1. What is the income elasticity of demand for beans?
2. What does this suggest about this product?

Question 7

Suppose that the price of a product increased from $18 to $22, and the quantity demanded decreased from 63 to 57.

1. What is the price elasticity of demand?
2. What does this suggest about this product?

Question 8

A decade-long economic boom and additional investment spending in green technology is one reason for the stress on electrical grids. "Canadian consumers have spent heavily on electricity-guzzling appliances, boosting demand for electricity faster than capacity is being added and suppliers react to meet this increased capacity."

Analyze this quote using a supply and demand diagram. Market: electricity.

Question 9

Stuff-Crust Pizza is a new pizza introduced by Pizza Hut. What happens to the equilibrium price and equilibrium quantity of Stuff Crust Pizza in each of the following situations?

a. Due to weather conditions, crop yields (including wheat) decreased.

b. The price of beer decreased

c. Domino's Pizza introduced a similar type of pizza that sold for $1 less than the one by Pizza Hut. d. A recession reduced households' income.

e. A new oven technology reduced the time it takes to bake a pizza