QUESTION 5 (10 Marks) Alto buys only books and Coffees and the Figure below shows his preference map: Books w 9 10 Coffee a) (3 marks) If Alto chooses 3 books and 2 coffees, what is his marginal rate of substitution? b) (3 marks) If Alto chooses 2 books and 6 Coffees, what is his marginal rate of substitution? c) (4 marks) Do Alto's indifference curves display diminishing marginal rate of substitution? Explain why or why not. Page 6 of 9QUESTION 4 (15 Marks) Your friend is having a party Friday night and at the party there will be cheese and wine. Unfortunately, your friend is known for his entrepreneurial nature and will be charging $5 for a glass of wine and $2.5 for a slice of cheese. The table below shows the marginal utility that you derive from consuming successive amounts of each goods. (1) (2) Units of Wine MUwine Units of Cheese MU cheese MU cheese 22 18 19 16 12 OOHWU UI PW NH 10 UI P WN HA a) (3 marks) Which column, (1) or (2), would be consistent with you going to the party hungry? Why? b) (6 marks) What quantities of wine and cheese would you consume if you: i. Went to the party hungry with $30? Use the table provided below to calculate the appropriate MU per dollar spent. Briefly explain how you got your answer. MUw/Pw MUc/Pc ii. (6 marks) Went to the party hungry with $30? Use the table provided below to calculate the appropriate MU per dollar spent. Briefly explain how you got your answer. MUw/Pw MUc/Pc Page 5 of 9c) Consider the figure below. Given the prices of wine and cheese, what would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? What does the marginal rate of substitution tell us? Wine 1,000 w* C* 500 Cheese Page 9 of 9QUESTION 6 (10 Marks) Anna owns a small pedicure business. She leases 4 computer-controlled massage chairs, for which she pays $125 each per day. She cannot increase the number machines she leases without giving the manufacturer 3 months' notice. She can hire as many workers as she wants at a cost of $75 per day per worker. These are the only two inputs she uses in her business. a) (6 marks) Use this information to fill in the columns in the table below: Average Quantity of Quantity of Variable Average Variable Marginal Workers Pedicures Fixed Cost Cost Total Cost Total Cost Cost Cost 0 10 WNH 25 45 62 70 b) (4 marks) Sketch the AVC and MC curves below: Qpedicures Page 7 of 9QUESTION 7 (10 Marks) Consider a consumer with an income of $3,000. They can choose between two goods, wine and cheese. The price pf wine is $3 a glass, and the price of cheese is $6 a pound. a) In the space below - draw the consumer's budget constraint (put cheese on the horizontal axis). What is the slope of her budget constraint? Wine Cheese b) The consumer's indifference curves for wine and cheese are shown on the graph below. Use this graph to describe and explain the four properties of the indifference curves. Wine AW MRS Ac Cheese Page 8 of 9QUESTION 3 (10 Marks) Suppose the government wants to deter the consumption of energy drinks. It decides to introduce a 20 percent tax on the drinks. A survey shows that the demand for energy drinks is perfectly elastic and people are equally happy to stop consuming those drinks and switch to healthier alternatives (like coffee). Producers of energy drinks complain and say they will increase their prices by 20 percent. Explain, and illustrate with a graph (in the space provided below), why energy drinks producers are wrong. (Assume that the demand curve is horizontal at the price of $1 and that before the tax the supply curve intersects with the demand curve at a quantity of 3.4 million). 1.60 1.40 Price (dollars per drink] 1.20 1.00 0.80 0.60 2.8 3.0 3.2 3.4 3.6 3.8 4.0 Quantity (millions of drinks per year) Page 4 of 9Imagine you are the marketing manager of a firm that produces three goods: X, Y and Z. The price elasticity of demand for the products is as follows: X is 1.2; Y is 1.00; Z is 0.75. You are made aware that the firm is experiencing significant cash flow issues and needs to increase total revenue. Given the above elasticity estimates, what would be your pricing strategy for each product? Complete the table below to show your strategy: Elasticity along Suggested price Impact on total the demand curve change revenue Product (i.e. elastic, (increase, decrease, no (increase, decrease, inelastic, unitary change) unchanged) elastic) N Grade: 190 Page 1 of 9d) (4 marks) Indicate in your diagram the area of consumer and producer surplus. Next, calculate the value of consumer and producer surplus. Show your work. Note: you will need to use the formula for the area of triangle and the formula for the area of a rectangle. e) (2 marks) Suppose that one of the pipelines that supplies gasoline to the Elgin is damaged and causes a gasoline shortage. Engineers have determined that pipeline capacity is reduced by 300 thousand litres - meaning that, at every price level, there are 300 thousand fewer litres of gasoline supplied to Elgin County. Which curve (demand or supply) is shifted? Which direction (leftward or rightward)? f) (4 marks) Determine the equation of the shifted curve you indicated in Part e. g) (2 marks) In your diagram above, draw the demand and supply curve after the pipeline damage and clearly compare the shifts. h) (4 marks) Determine the equilibrium price and quantity (algebraically) and calculate the value of consumer and producer surplus after the pipeline damage. Page 3 of 9QUESTION 2 (25 marks) Consider the market for gasoline in Elgin County, Ontario. (Note: all units of quantity and price are in thousands of litres and dollars per litre, respectively). Suppose the demand for gasoline is given by: Qa = 2000 - 200P Consider the following information about the supply curve estimated by a local marketing research company: . For every increase in price by $1 per litre, quantity supplied (Qs), increases by 100 thousand litres. . AND, when the price is $1/litre, 900 thousand litres of gasoline are supplied to Elgin County. a) (3 marks) Given the above information, find the supply function (i.e., determine a and b in Qs = a + bP. b) (3 marks) In the space provided below, plot the demand and supply curve and make sure you label the curves and clearly write the intercepts on both axes. Price $10 $9 SS so 0 500 1000 1500 2000 Quantity c) (3 marks) Find the equilibrium price and quantity algebraically and indicate it in your diagram. Show your work. PE = $ QE = $ Page 2 of 9