Economics Homework Four Answers - Student Four

DeborahB.

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

Correct!

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? My consumer surplus would be $1,000. The concept of consumer surplus means that the "consumer surplus" is the net benefit, in dollars, a consumer obtains from buying a good. This means that total benefit - total cost = consumer benefit.

Superb, may use as a model.

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 should hike for 3 hours, which would give me 23 units (10 for the first hour, 8 for the second hour, 5 for the third hour), and then read for two hours, which would bring my total utility points up to34 hours (10+8+5+12 for two hours of reading=34). Any other combination of these activities would result in less utility.

Correct, except your order is off. Your third hour is better spent reading rather than hiking. Then return for one hour of hiking as hour 4 or 5. (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? In order to get the higher consumer surplus, you should tell the dealer to sell it to you at the price you would have payed for it on the free market,instead of telling him you would buy it for the brand new price. This way the total benefit cost (free market) - total cost (full price) = consumer benefit ( how much money you were saving because you were buying the car for less then you planned).

Superb, will 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? It is a straight parallel line going from the upper left down to the lower right because they are a perfect substitute because that person is perfectly willing to substitute one good for another. The slope must be negative one because the substituting has to be one-for-one to make it -1 on the graph.

Terrific.

6\. Describe either the "income effect" or the "substitution effect." Take your pick. Income effect: the effect that a change in price of a good has on a buyer's overall income. When the price of a good decreases, a buyer of the good saves money, which in the end is just like he earned more money. For example, if someone eats bacon for breakfast every morning, and goes through about a pound of bacon in one week, and the price of bacon goes down one dollar, the person has an extra dollar to spending something else that week instead of bacon. Therefore, it is like he is making money.

Correct, except the person could spend that extra dollar on bacon, and hence the income effect is part of the Law of Demand: price goes down, person has more money, person can then buy more of the SAME good. (Minus 1).

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 that free market comes first and is the horse - yes, it is true that charity is a huge part of America today, but would people even have the freedom and liberty to decide to be charitable to whatever organization they wish if there was no free market? Consider the communist time when Hitler was ruling - do you think those people under his tyrannical ruling would have been able to donate whatever they wanted to whatever cause they wanted? No! You weren't even allowed to help a Jew, unless you were doing it secretly, and if you were caught you were penalized harshly. Compare that to America today, where there is a free market where people have the right to do whatever they please!

Excellent.

Fantastic work. 69/70. Well done!--Andy Schlafly 11:30, 11 October 2009 (EDT)