Economics Homework Four Answers - Student Ten

1\. A consumer's overall satisfaction is expressed in economics as his Total Utility.

Excellent

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 is $1,000. I'm willing to pay $10,000 for the car, but I get it $9,000. So $1,000 net difference between what I did pay and what I would have paid.

Superb.

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. I would spend 3 hours hiking and 2 hours reading. That would be 10+8+5+6+5=34 hour’s total utility. the decrease in marginal utility between the two activities cross each other at 5 units, so that is about as low as you want to go for hiking, since the next decline is a lot less than the upper levels of utility for reading, so we'll substitute reading for hiking at that point. If you cross the two decline slopes you want to choose the points above the cross to maximize utility.

Superb, will use as a model.

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? As the dealer increases the cost of the used car, my demand (desire) for the car will decrease. The same will happen for other customers coming into his car lot. In order to sell the used car, he is going to have to lower the price eventually in order to reach an equilibrium that makes the buyer and seller happy, so he might as well do it right now. Carpe diem!

Excellent! Nice use of "carpe diem."

5\. Explain why the shape of an indifference curve for two goods that are perfect substitutes is a straight line going from the upper left down to the lower right. Extra credit: why must its slope be negative 1? You would plot 0 - 10 (or whatever number you want) starting with 0 on the X-axis and do the same on the Y-axis. Connect, with a straight line, the same value on each axis directly (running from left to right and downward), since X=Y for a perfect substitute. The slope is calculated as rise over run or 1/-1 which equals -1.

Fantastic.

6\. Describe either the "income effect" or the "substitution effect." Take your pick. The income effect is part of the Law of Demand. It says that if you save money on a purchase, it is like earning the difference between what you would have paid and what you did pay. For example, if I am on my way to Walmart to buy a LEGO set for $20, and I stop at a yard sale on the way and find the same set for $5, it is the same as earning $15.

Superb, but you didn't fully link it 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). Charity came first. Since we are made in God's image and God is love, our basic nature is charitable. Because we now have selfish ways, we have added a twist to charity, so that we get a return on our money (the free market). The free market isn't necessarily bad,it is just an imperfect form of doing things for others. The basis of helping others for gain or no gain is ultimately based on charity.

Excellent.

The best (non-honors) homework in the class so far. Congratulations! Score: a perfect 70/70.--Andy Schlafly 15:15, 11 October 2009 (EDT)

'''''Aran M.'''''