Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of $2 in gasoline money. He has a total of $10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.11, figure out the points on Jeremy’s consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.
Take Jeremy’s total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremy’s utility
Explain all the reasons why a decrease in a product's price would lead to an increase in purchases.
As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?
Siddhartha has 50 hours per week to devote to work or leisure. He has been working for $8 per hour. Based on the information in Table 6.12, calculate his utility-maximizing choice of labor and leisure time.
In Siddhartha’s problem, calculate marginal utility for income and for leisure. Now, start off at the choice with 50 hours of leisure and zero income, and a wage of $8 per hour, and explain, in terms of marginal utility how Siddhartha could reason his way to the optimal choice, using marginal thinking only.
How would an increase in expected income over one’s lifetime affect one’s intertemporal budget constraint? How would it affect one’s consumption/saving decision?
How would a decrease in expected interest rates over one’s working life affect one’s intertemporal budget constraint? How would it affect one’s consumption/saving decision?
Who determines how much utility an individual will receive from consuming a good?
Would you expect total utility to rise or fall withadditional consumption of a good? Why?
Would you expect marginal utility to rise or fall with additional consumption of a good? Why
Is it possible for total utility to increase while marginal utility diminishes? Explain.
If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?
What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain
why, if this rule does not hold, the choice cannot be utility-maximizing.
As a general rule, is it safe to assume that a change in the price of a good will always have its most
significant impact on the quantity demanded of that good, rather than on the quantity demanded of other goods? Explain.
Why does a change in income cause a parallel shift in the budget constraint?
How will a utility-maximizer find the choice of leisure and income that provides the greatest utility?
As a general rule, is it safe to assume that a higher wage will encourage significantly more hours worked for all individuals? Explain.
According to the model of intertemporal choice, what are the major factors which determine how much
saving an individual will do? What factors might a behavioral economist use to explain savings decisions?
As a general rule, is it safe to assume that a lower interest rate will encourage significantly lower financial savings for all individuals? Explain.
Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?
The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.” When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of
diminishing marginal utility why the Washington Monument strategy is so misleading. Hint: If you are
really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or the lowest marginal utility?
Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?
In the labor-leisure choice model, what is the price of leisure?
Think about the backward-bending part of the labor supply curve. Why would someone work less as a result of a higher wage rate?
What would be the substitution effect and the income effect of a wage increase?
Visit the BLS website and determine if education level, race/ethnicity, or gender appear to impact labor versus leisure choices.
What do you think accounts for the wide range of savings rates in different countries?
What assumptions does the model of intertemporal choice make that are not likely true in the real world and would make the model harder to use in practice?
Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers.
Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs
three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla’s budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-bystep process based on marginal utility, create a table and identify Praxilla’s utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers.
If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded
of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?