Economics Homework Four Answers - Student Twenty-One

Michelle F-In progress

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?

$1,000. “Consumer surplus” is the total benefit minus cost. In other words, the amount the buyer was willing to pay for something, minus the price that was actually charged.

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.

You should spend 3 hours hiking, then 2 hours reading. That would maximize your total utility for those 5 hours, putting the marginal utility at 34. If you had spent 3 hours reading and only 2 hiking, your marginal utility would only have been 33. The reason for this is that while your total utility for hiking may drop more than twice as fast, it started much higher.

Correct, except your order is slightly off. The third hour must be spent on reading, not hiking, in order to maximize utility. (Minus 1).

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 find the going rate on the free market for a used car of that make and model, then ask if the car dealer would match or beat the price. If he won’t, remind him that if you could buy a new car for the same price why would you settle for a used one, even if it is only gently used. Should he persist in seeing things differently, simply take your business elsewhere.

Terrific, may use as a model answer.

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?

It takes the shape of a straight line because when two goods are absolutely perfect substitutes, they are theoretically equal in use and desirability. So in order for one to be better than the other, you must get more for the same price. Hence the straight line.

Correct.

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

When the price of a good increases, or the price of it's substitute decreases, the demand for the initial good lessens. If the companies who make butter all decided to double the price of their product, less people would buy butter. Likewise, if the people who made margarine decided to cut their price in half, more people would buy that instead of butter. This is called the substitution effect, and it is part of the reason why the Law of Demand is true.

"its", not "it's". Otherwise terrific, 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 they both work together, and independently at the same time. I think the free market enables people to have control of their finances and have money to give. But if people had no desire to give, then they wouldn't, free market or no. If there was no free market, I think people would still give, but not as freely. I don't know if it is possible to determine which came first.

Terrific.

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.

Americans do want to save money, nearly as much as they want to earn and spend it. Maybe if more people realized that a penny SAVED is a penny earned, they might put more time into saving than earning and spending their earnings. And if a penny saved is a penny earned, then what is a penny spent, or in debt? Well, a penny spent isn’t so bad, so long as it is spent wisely. Maybe if more people took economics, and knew about consumer surplus, they would spend more wisely! And for every penny spent, that is 0.07 in Uncle Sam’s pocket. So what is a penny in debt? When in debt, you are required to pay for every month you haven’t paid back what you owe. An interest is charged based on what you owe. The flip side of this famous saying might be “a penny spent multiplies rapidly, and not usually in your favor”. Also to be taken into consideration is the fact that you could earn money with your savings by putting it in an account that will generate interest. It may not be very much money, but its money that you didn’t have before. Perhaps a course on economics and personal finance should be a required course in school. “ A penny saved is a penny earned” and “ Time is money” are two maxims that are seen as archaic maxims that have little applicability. It may be time for them to make a comeback.

Excellent insights in your answer. I particularly like you discussion of a "penny spent," including your observation that a penny spent wisely may be a good thing.

109/110. Terrific work! Congratulations.--Andy Schlafly 16:05, 11 October 2009 (EDT)