Economics Homework Four Answers - Student One

VERONIKAF

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

Marginal Utility

Not quite. "Total utility" is the correct answer, because it is the OVERALL satisfaction, not "marginal utility." (Minus 1). Marginal utility is only the utility at the "margin" (the additional utility from something on top of overall utility).

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’s surplus” equals $1,000. The difference between the total amount that a consumer is willing to pay for a specific good and the seller’s price is the consumer’s surplus. Consumer’s surplus is when a consumer becomes richer in a certain way because he was willing to pay more for a good than the seller has asked for it. The consumer benefits from this because he does not have to spend that extra money that he would have spent willingly Since the seller asked for less than what the consumer was willing to pay, the consumer automatically gained money for himself even though he always had it before. There are many ways in which you can become richer without receiving money from another.

Excellent.

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 my utility I would hike the first two hours, read the second two hours, and then hike for my final hour until I would have spent my five hour extra hours doing what I love. My utility would be 34 units because I would have used the first most enjoyable hours of both hiking and reading. That way my utility would be the highest it could get without stopping repeatedly, and I would still have an assortment of activities.

Superb.

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 tell the dealer that you are willing to pay $20,000 for the car that was used because the value of that used car drastically decreases when it was ridden. When the dealer realized that his chance to take advantage of your personal preferences has vanished he will sell you the car because it would benefit him too. The one thing about cars which helps the consumer but not the seller is that the first couple of miles decrease the value by a lot. It is cheaper to buy a car that was used slightly than pay for a new overly price car. Even though the dealer did not get as much as he could have if you had followed your personal preferences, he should consider himself very lucky because it is hard to sell a use car that was specially made for someone else. Your overall consumer surplus was increased by $5,000 because instead of following your personal preferences (in which you would gain now consumer’s surplus except the happiness of owning a new car) you followed the “market”. The free market is always there to help you out.

Terrific answer, may use as a model.

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? The indifference curve is straight because the values of the goods are the same. The lines are parallel, but as your value goes up, your quantity decreases. For example, you may prefer one ice cream cone to two slices of chocolate cake, and in the end you would be left with one good instead of two, but your personal value for that cone is greater than for those two slices. The slope on the graph is negative one because it demonstrates a 2 for 1 deal; someone is losing one of their goods.

Good, but the 2-for-1 trade does not describe a PERFECT substitute. (Minus 1).

6\. Describe either the "income effect" or the "substitution effect." Take your pick. Substitution effect is one of the causes for the struggling American companies. As you may expect, manufacturing goods outside of the USA is cheaper for companies. They would rather pay half the price of transaction cost in making a good than manufacturing their goods in the USA for an expensive price. Number one, the manufacturing would cost money, which would force them to increase the price of their goods resulting in a decrease in demand. People will not want to pay for expensive pants made in the USA. The consumer will just go to the clothing store next door and buy pants which are the same quality and made outside of the USA. Getting your dollar’s worth has been drilled into the heads of the past couple of generations, which results in people trying to find the cheapest way to do and get things. Substitution effect is both good and bad for it benefits the common people, but is destroying the companies and manufacturers in the USA.

Interesting analysis!

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 believe charity is based on the foundation of a successful free market because it relies on the good of the people. Most people will only give donations to charities if their income is steady. People will first try to solve their financial problems before they start giving away their money to others when they need it themselves. People today are so enveloped in greed and ambition that they forget that some other person in the world is dying of pneumonia because they have no medicine. Many people are spending their money on unnecessary luxuries when they could be saving lives. It is always great to spend some extra money on yourself, but then it can get to a point when it is excessive. If you were in the shoes of a person in Africa dying from starvation you must feel that no one cares about you because your “brethren” out there are spending a great amount of money on things for which they have no real use. People do not want to know what is happening in the world because then they will realize how selfish and vain they were when they could have been saving many lives all over the world. The free market is the horse that pulls charity along struggling to survive the bumps. We put ourselves above everyone else; our needs come first. When you are barely surviving you do not have the money to donate to a charity that is why the free market is there so that charity may create innovative ways to get money from others and not only depend on the common people. If there was no free market, charity would have a hard time surviving. It would go nowhere as a cart stays stationary if there is no horse to pull it.

Great essay!

Honors

Write in about 300 of your own words on one or more of the following topics:

8\. "A penny saved is a penny earned!" In fact, once taxation is taken into account, "a penny saved is almost two pennies earned!" Discuss one or both of these quotations.

"A penny saved is a penny earned!" is an insightful quote that relates to all of our financial lives. It describes how by being frugal you are actually earning money as you go along. For example, let’s say you badly wanted an ice cream cone one hot summer day and there were two ice cream parlors nearby. You knew that one of them was cheaper than the other even though the ice cream was the same quality. Instead of going to the popular expensive ice cream parlor, you decide to save $1 by going to the less expensive store to buy ice cream. In the end, you have increased your income amount by $1 which you can use in a more useful way. If you would have gone to the popular ice cream store you would have spent an extra dollar, which you would have to work to earn back. So instead of spending an extra dollar for an atmosphere with lots of people you now have earned a dollar without having to work for it.

Terrific answer.

10\. Prove the Law of Demand as simply as you can, perhaps using the assumption that the consumer always tries to maximize marginal utility.

The law of demand states the decrease in price increases the demand. To support this theory is the idea that a consumer always tries to maximize their marginal utility. People tend to buy more of a certain good when the price decreases. For example, you enter Abercrombie and Fitch to buy a sweater for the winter but when you see that the sweaters are half price, you decide to buy a scarf to go with it since you have the extra money you were willing to pay for the sweater. In the end, you have maximized your marginal utility because you have gotten more for your money than you had thought you would. Even though you would have been willing to pay full price for that sweater, you cannot give up a great deal in which you can get a “free” scarf. Through your purchase you have proven that the law of demand is incorporated in everyone’s daily life.

Good.

Extra Credit for Anyone

12\. Explain whether goods X or Y are perfect substitutes or complements or something else for the indifference curves below, and why:

This graph illustrates three goods which were replaced by three other complementary goods. This graph could apply to sports equipment. As each season abruptly takes the place of another, the sales of sport equipment change radically. For example, the purchase of skis increases considerably when winter approaches but baseball equipment sales decrease rapidly since no one is going to play baseball in the middle of the winter.

You're close by mentioning the complementary goods, but your explanation is not quite on target. Plus 1.

Total score: 109/110. Congratulations!!!--Andy Schlafly 10:56, 11 October 2009 (EDT)