Economics Homework Four Answers - Student Fourteen

AmandaS

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?:

Consumer surplus is the difference between the amount that consumers actually pay and the amount that they would have been willing to pay. If I had been willing to buy a car for $10,000 but only paid $9,000 I would have $1,000 remaining which would be the consumer surplus.

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.

In order to maximize your utility, you need to do the things that you enjoy the most first. If hiking gives a utility of 10 units for the first hour and reading only gives a utility of 6 it is better to start off hiking. I would spend the first three hours hiking, which would give me a total of 23 units. Then spend the last two hours reading, which gives a total of 11 units. All together the total would be 34 units.

Correct, except hike for only the first two hours, then switch to reading, then back to hiking. Your order is slightly off. (Minus 1).

4\. Suppose you plan to buy a brand new car for $25,000. When you go 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?:  I would make a deal with him. Instead of purchasing the car for the same amount of a new one, I would buy the car for a couple thousand dollars less. That way the dealer would still make a sale, and I would come out happy.

Excellent.

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?  Because both are perfect substitutes for each other, they are both equally preferred.

Right, but could explain a bit more.

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

The income effect is an economic term used to describe the changes of price in a demand or service. When the price of a good decreases it allows the buyer to save more money or use that money to buy more of the good.

Superb, may use as a model.

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 charity is based off of the free market. Charity is an act of generosity towards those in need and the free market is business governed by the laws of supply and demand, and is not restrained by government interference. The free market gives people the incentive to work hard and make more money which then leads to charity. When people are making more money they are more likely to donate some of that money to those who are in need.

Right. Excellent answer.

Fantastic work. 69/70. Congratulations!--Andy Schlafly 15:35, 11 October 2009 (EDT)