Economics

Michael Parkin

Chapter 8

Utility and Demand - all with Video Answers

Educators

KM

Chapter Questions

Problem 1

List the combinations of yogurt and berries that Jerry can afford. Draw a graph of his budget line with the quantity of berries plotted on the $x$ -axis.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 2

How do Jerry's consumption possibilities change if, other things remaining the same, (i) the price of berries falls and (ii) Jerry's income increases? Use the following data to work Problems 3 to 5 Max has $\$ 35$ a day to spend on windsurfing and snorkeling and he can spend as much time as he likes doing them. The price of renting equipment for windsurfing is $\$ 10$ an hour and for snorkeling is $\$ 5$ an hour. The table shows the total utility Max gets from each activity.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 3

Calculate Max's marginal utility from windsurfing at each number of hours per day. Does Max's marginal utility from windsurfing obey the principle of diminishing marginal utility?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 4

Calculate Max's marginal utility from snorkeling at each number of hours per day. Does Max's marginal utility from snorkeling obey the principle of diminishing marginal utility?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 5

Which does Max enjoy more: his Gth hour of windsurfing or his 6 th hour of snorkeling?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 6

Use the data in Problem 3 to work Problems 6 to 8
Make a table of the combinations of hours spent windsurfing and snorkeling that Max can afford.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 7

Use the data in Problem 3 to work Problems 6 to 8
Add two columns to your table in Problem 6 and list Max's marginal utility per dollar from windsurfing and from snorkeling.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 8

Use the data in Problem 3 to work Problems 6 to 8
a. To maximize his utility, how many hours a day does Max spend on each activity?
b. If Max spent a dollar more on windsurfing and a dollar less on snorkeling than in part
(a), how would his total utility change?
c. If Max spent a dollar less on windsurfing and a dollar more on snorkeling than in part (a), how would his total utility change?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 9

Use the data in Problem 3 to work Problems 9 to 13
If the price of renting windsurfing equipment is cut to $\$ 5$ an hour, how many hours a day does Max spend on each activity?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 10

Use the data in Problem 3 to work Problems 9 to 13
Draw Max's demand curve for rented windsurfing equipment. Over the price range $\$ 5$ to $\$ 10$ an hour, is Max's demand elastic or inelastic?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 11

Use the data in Problem 3 to work Problems 9 to 13
How does Max's demand for snorkeling equipment change when the price of windsurfing equipment falls? What is Max's cross elasticity of demand for snorkeling with respect to the price of windsurfing? Are windsurfing and snorkeling substitutes or complements for Max?

KM

Kanishk Mishra

Numerade Educator

Problem 12

Use the data in Problem 3 to work Problems 9 to 13
If Max's income increases from $\$ 35$ to $\$ 55$ a day, how does his demand for windsurfing equipment change? Is windsurfing a normal good? Explain.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 13

Use the data in Problem 3 to work Problems 9 to 13
If Max's income increases from $\$ 35$ to $\$ 55$ a day, how does his demand for snorkeling equipment change? Is snorkeling a normal good? Explain.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 14

Baseball and gluttony, two of America's favorite pastimes, are merging, with Major League Baseball stadiums offering all-you-can-eat seats. Some fans try to "set personal records" during their first game, but by the third time in such seats they eat normally.
What conflict might exist between utility maximization and setting "personal records" for eating? What does the fact that fans eat less at subsequent games indicate about their marginal utility from ballpark food as they consume more?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 15

Baseball and gluttony, two of America's favorite pastimes, are merging, with Major League Baseball stadiums offering all-you-can-eat seats. Some fans try to "set personal records" during their first game, but by the third time in such seats they eat normally.
How can setting personal records for eating be reconciled with marginal utility theory? Which ideas of behavioral economics are consistent with the information in the news clip?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 16

Joy goes bowling once and ice skating twice a month when he has $\$ 20$ to spend on these activities. A visit to the bowling alley costs $\$ 10,$ and an ice skating ticket costs $\$ 5 .$ Draw Joy's budget line. If the price of an ice skating ticket falls to $\$ 4,$ describe how Joy's consumption possibilities change.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 17

Cindy has $\$ 70$ a month to spend, and she can spend as much time as she likes playing golf and tennis. The price of an hour of golf is $\$ 10,$ and the price of an hour of tennis is $\$ 5 .$ The table shows Cindy's marginal utility from each sport.
$$\begin{array}{ccc}
& \text { Marginal } & \text { Marginal } \\
\text { Hours } & \text { utility from } & \text { utility from } \\
\text { per month } & \text { golf } & \text { tennis } \\
\hline 1 & 80 & 40 \\
2 & 60 & 36 \\
3 & 40 & 30 \\
4 & 30 & 10 \\
5 & 20 & 5 \\
6 & 10 & 2 \\
7 & 6 & 1
\end{array}$$
Make a table that shows Cindy's affordable combinations of hours playing golf and tennis. If Cindy increases her expenditure to $\$ 100,$ describe how her consumption possibilities change.

Akash M

Numerade Educator

Problem 18

Use the information in Problem 17 to work Problems
a. How many hours of golf and how many hours of tennis does Cindy play to maximize her utility?
b. Compared to part (a), if Cindy spent a dollar more on golf and a dollar less on tennis, by how much would her total utility change?
c. Compared to part (a), if Cindy spent a dollar less on golf and a dollar more on tennis, by how much would her total utility change?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 19

Use the information in Problem 17 to work Problems
Explain why, if Cindy equalized the marginal utility per hour of golf and tennis, she would not maximize her utility.

KM

Kanishk Mishra

Numerade Educator

Problem 20

Cindy's tennis club raises its price of an hour of tennis from $\$ 5$ to $\$ 10$, other things remaining the same. a. List the combinations of hours spent playing golf and tennis that Cindy can now afford and her marginal utility per dollar from golf and from tennis.
b. How many hours does Cindy now spend playing golf and how many hours does she spend playing tennis?

KM

Kanishk Mishra

Numerade Educator

Problem 21

Use the information in Problem 20 to draw Cindy's demand curve for tennis. Over the price range of $\$ 5$ to $\$ 10$ an hour of tennis, is Cindy's demand for tennis elastic or inelastic?

KM

Kanishk Mishra

Numerade Educator

Problem 22

Explain how Cindy's demand for golf changed when the price of an hour of tennis increased from $\$ 5$ to $\$ 10$ in Problem $20 .$ What is Cindy's cross elasticity of demand for golf with respect to the price of tennis? Are tennis and golf substitutes or complements for Cindy?

KM

Kanishk Mishra

Numerade Educator

Problem 23

Cindy takes a Club Med vacation, the cost of which includes unlimited sports activities. With no extra charge for golf and tennis, Cindy allocates a total of 4 hours a day to these activities.
a. How many hours does Cindy play golf and how many hours does she play tennis?
b. What is Cindy's marginal utility from golf and from tennis?
c. Why does Cindy equalize the marginal utilities rather than the marginal utility per dollar from golf and from tennis?

Akash M

Numerade Educator

Problem 24

Cindy takes a Club Med vacation, the cost of which includes unlimited sports activities. With no extra charge for golf and tennis, Cindy allocates a total of 4 hours a day to these activities.
a. How many hours does Cindy play golf and how many hours does she play tennis?
b. What is Cindy's marginal utility from golf and from tennis?
c. Why does Cindy equalize the marginal utilities rather than the marginal utility per dollar from golf and from tennis?

Akash M

Numerade Educator

Problem 25

Katy has made her best affordable choice of noodles and iced tea. She spends all of her income on 15 packets of instant noodles at $\$ 3$ each and 30 cups of iced tea at $\$ 2$ each. Now the price of
a packet of noodles rises to $\$ 3.50$ per packet and the price of iced tea falls to $\$ 1.75$ a cup.
a. Will Katy now be able to consume 15 packets of instant noodles and 30 cups of iced tea? b. If Katy changes the quantities she buys, will she buy more or fewer packets of instant noodles? Explain your answer.

KM

Kanishk Mishra

Numerade Educator

Problem 26

Shelly, a homemaker, spends $\$ 70$ twice a year on 10 grams of saffron and $\$ 140$ a year on 28,000 gallons of tap water.
a. Out of saffron and water, which is more valuable to Shelly?
b. Explain how Shelly's expenditure on saffron and water illustrates the paradox of value.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 27

Researchers at Stanford and the University of Pennsylvania estimated that a healthy human life is worth about $\$ 129,000 .$ Using Medicare records on treatment costs for kidney dialysis as a benchmark, the authors tried to pinpoint the threshold beyond which ensuring another "quality" year of life was no longer financially worthwhile. The study comes amid debate over whether Medicare should start rationing healthcare on the basis of cost effectiveness.
Why might Medicare ration healthcare according to treatment that is "financially worthwhile" as opposed to providing as much treatment as is needed by a patient, regardless of costs?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 28

Researchers at Stanford and the University of Pennsylvania estimated that a healthy human life is worth about $\$ 129,000 .$ Using Medicare records on treatment costs for kidney dialysis as a benchmark, the authors tried to pinpoint the threshold beyond which ensuring another "quality" year of life was no longer financially worthwhile. The study comes amid debate over whether Medicare should start rationing healthcare on the basis of cost effectiveness.
What conflict might exist between a person's valuation of his or her own life and the rest of society's valuation of that person's life?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 29

Researchers at Stanford and the University of Pennsylvania estimated that a healthy human life is worth about $\$ 129,000 .$ Using Medicare records on treatment costs for kidney dialysis as a benchmark, the authors tried to pinpoint the threshold beyond which ensuring another "quality" year of life was no longer financially worthwhile. The study comes amid debate over whether Medicare should start rationing healthcare on the basis of cost effectiveness.
How does the potential conflict between self interest and the social interest complicate setting a financial threshold for Medicare treatments?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 30

After you have studied Economics in the News (pp. $232-233$ ), answer the following questions.
a. If big cups of sugary drinks are banned at restaurants, theaters, and stadiums,
(i) How will the price of an ounce of sugary drink change?
(ii) How will consumers respond to the change in price? b. If a tax is imposed on sugary drinks, how does
(i) The marginal utility of a sugary drink change?
(ii) The consumer surplus in the market for sugary drinks change?

Breanna Ollech

Numerade Educator

Problem 31

Five Signs You Have Too Much Money When a bottle of water costs $\$ 38,$ it's hard not to agree that bottled water is a fool's drink. The drink of choice among image-conscious status seekers and high-end tee-totalers in L.A. is Bling $\mathrm{H}_{2} \mathrm{O} .$ It's not the water that accounts for the cost of the $\$ 38,$ but the "limited edition" bottle decked out in Swarovski crystals. a. Assuming that the price of a bottle of Bling $\mathrm{H}_{2} \mathrm{O}$ is $\$ 38$ in all the major U.S. cities, what might its popularity in Los Angeles reveal about consumers' incomes or preferences in Los Angeles relative to other major U.S. cities?
b. Why might the marginal utility from a bottle of Bling $\mathrm{H}_{2} \mathrm{O}$ decrease more rapidly than the marginal utility from ordinary bottled water?

KM

Kanishk Mishra

Numerade Educator

Problem 32

A new study by economists Justin Wolfers and Betsey Stevenson has cast doubt on the credibility of the Easterlin paradox, which claims that higher incomes do not necessarily make people happier. The new study states that people do report more happiness and satisfaction as they grow richer. Moving from rich to richer seems to raise happiness just as much as moving from poor to less poor.

Source: The Economist, May 2,2013
According to the news clip:
a. How does moving from rich to richer influence total utility?
b. How do total utility and marginal utility from consumption change over time?

Brandon Miskanic

Brandon Miskanic

Numerade Educator