Economics Homework Four Answers - Student Sixteen

Economics lecture 4 James G.

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

Right, even better is "total utility" in order to distinguish it from "marginal utility."

2\. Q) 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 work very 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?

A) The consumer surplus is the amount of money you would be willing to purchase a product for minus the amount that the seller is willing to ask for the product. In this situation your consumer surplus is about $1000.

Excellent.

3\. Q) 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.

A) You would start off hiking for about three hours because you get a lot of utility for those hours, but as you go into the fourth and fifth hour you should read a book as the utility for reading a book is now better (6 and 5 units) than hiking (3 and 1 units).

No, hike for the first two hours then switch to reading, then back to hiking (minus 1). Also, the question asks for the total utility. (Minus 1). Otherwise your analysis is fine.

4\. Q) 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?

A) You should ask for the market price as it will give you a significant consumer surplus which could be used for important needs like fuel for the car.

Superb.

5\. Q) 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. A) The line is straight because the utility is constant.

Not a full explanation. See model answers when ready. (Minus 1).

6\. Q) Describe the "income effect".

A) The overall effect that a slight change in price of a good could have on a buyer's overall income is the income effect.

Good, need to link to Law of Demand.

7\. Q) 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).

A) I believe that the free market gives abundance which encourages then the ability for charities to flourish giving back to the free market leading to a hand in hand cycle encouraging the overall growth of the economy.

Terrific answer.

67/70. Great work!--Andy Schlafly 15:46, 11 October 2009 (EDT)