Economics Homework Four Answers - Student Five

Anna M

1. A consumer's overall satisfaction is expressed in economics as his _________________.

Total utility.

Correct.

2. Suppose you see a sleek-looking used sports car and you immediately want to buy it. You think to yourself, "I can paint that car and fix it up so it looks brand new!" You like it so much that you would very work hard for a year and save up $10,000 to buy it. You ask the owner how much he'd sell the car for, and he says $9,000. If you buy it for $9,000, then what is your "consumer surplus"? What does that concept mean?

Your consumer surplus would be $1,000. The consumer surplus is the difference between what you paid, and what you would have paid.

Excellent. Concise and to-the-point. Will use as a model.

3. Suppose your favorite hobbies are reading books and hiking, and imagine that they have the following values for marginal utility. The first hour that you hike gives you lots of utility: 10 units. But as you start to tire, you enjoy and benefit from it less. The next hour of hiking is worth only 8 units of utility (in other words, it has a marginal utility of 8 units rather than 10), and the next hour of hiking is worth only 5 units, and then 3, then 1, and then zero for the next hours, in that order. Your marginal utility for reading books does not decline so quickly. In the first hour, reading a book gives you utility of 6 units; the next hour is worth 5 units; the next hour is worth 4 units; and then 3, 2, 1 and 0. Suppose that you have 5 extra hours today. How should you spend those hours on hiking and reading in order to maximize your utility, and what will be your total utility for those 5 hours? Explain your answer.

To maximize your total utility, you should hike for 3 hours, and read for 2. This is 10 + 8 + 5 + 6 + 5 = 34. This is the best combination because after three hours of hiking, the total utility for hiking is lower than it is for reading. This means that, in order to max your utility, you should switch to reading, since it's utility is higher.

Correct, except the order is 2 hours of hiking, and then one hour of reading. (Minus 1). Rest of the answer is fine. Also note: "its", not "it's" in your last phrase.

4. Suppose you plan to buy a brand new car for $25,000. When you do to the car dealership to make your purchase, you notice that there is a car on the lot that looks brand new but not longer has the sticker price on it. The dealer says it was returned by someone after driving it only 100 miles. You like the color and ask if you can buy it. The dealer, seeing that you’re so interested, says he’ll sell it to you for the same price as a brand new car that has never been sold. You’re willing to buy it at full price, and do not mind one bit that someone else used it briefly and returned it. But you notice that other people (the “market”) would not pay full price for a returned car. Relying on the “market” rather than your personal preferences, what should you tell the dealer in order to maximize your benefits from your purchase?

You should ask for the free market price. This would give you the highest consumer surplus possible. The dealer should agree, because it's in his best interests to sell the car to you, before you go buy another one at another dealership.

Superb.

SUBSTITUTE: 11. Discuss the Irish Potato Famine between 1846 and 1849, and whether you think potatoes were an "inferior good" then.

The potato famine was the result of a blight which was carried throughout the Irish countryside in the wind. It affected the potato crops, which were Ireland's main source of food. It caused leaves to blacken and wilt, and the potatoes would shrivel within days of being harvested. This was a severe problem, since the potato made up the bulk of the Irish diet. A healthy working male could eat close to 14 pounds of potatoes per day. The famine was mostly due to the fact that the Irish depended too much on their potatoes, and rarely ate anything else. Since their dependence on the potato was so high, people with healthy potato crops could raise their prices, and people would still buy them. This caused potatoes to become an inferior good.

Good history, but your last sentence is not explained correctly. An "inferior good" is one that sees increased demand when the public has less income. Potatoes may well have been an inferior good, but your explanation does not say why.

6. Describe either the "income effect" or the "substitution effect." Take your pick.

The income effect is the result of a decrease in the price of a product. When the price decreases, demand increases. When someone buys something for less than they originally intended to pay, the surplus money they have is essentially income.

Good, but could link better to the Law of Demand.

7. Charity is based on the foundation of a successful free market. Or is a successful free market based on a foundation of charity? Describe and explain which is the cart, and which is the horse (in other words, which comes first or is most important, charity or the free market).

I think that Charity is based on a successful free market. Without having to means to donate, charity cannot exist. For example, people in communist countries do not (usually) have the means to create organizations to help other people, since they are too busy helping themselves. Charities also rely totally on the donations of others. If people don't donate, charity will not exist. In the free market, people have surplus money. They have the free time to volunteer, and they have a good attitude towards helping others. They have a sense of fairness, which is the result of the free market. The people in the free market will use their extra resources to help in charity, and thus, charity only exists on the free market.

Superb.

69/70. Excellent work!--Andy Schlafly 13:38, 11 October 2009 (EDT)