Economics Homework Four Answers - Student Eight

Economics Homework 4

Duncan B.

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

Excellent.

2. "Consumer surplus" is the amount of money above the asking price at which you would have still made a purchase. In the example, you were willing to purchase an old sports car for $10,000, but the asking price was only $9,000. Your consumer surplus is the $1000 which you were willing to pay but did not have to pay.

Superb.

3. You should spend 3 hours hiking and 2 hours reading, making a total of 34 units. The three hours of hiking are worth 10, 8, and 5, and the two hours reading are worth 6 and 5.

Correct, but you might mention the order of the activities.

4. You should tell the dealer that you are willing to buy it at the price it would have gotten on the free market, not telling him that you would buy it at the price of a new one. You will thus get a high consumer surplus.

Excellent.

5. When graphing an indifference curve for two perfect substitutes on a x-y graph, you must be able to draw a straight line up from the y-axis at 2 and have it intersect the curve at 2 also if you have four possible objects. Likewise, with four possible objects , you must be able to draw a line up from 3 and have it intersect the line at 1. If the slope was +1, you would always have to have equal numbers of objects.

Don't see what you're getting at here. Indifference curves compare TWO goods, not FOUR. (Minus 1).

6. The substitution effect is the phenomena which occurs when the price of a good (such as potato chips) goes down. More people will begin to buy potato chips rather than popcorn or corn chips, due to the lower price.

Good, could link to the Law of Demand.

7. The free market always comes before charity, enabling people to be charitable. A person can feel very charitable, but unless they have the finances to allow them to help, it is hard for them to actually do anything. The first stages of competition in a developing and expanding free market are always brutal, (for example, the Industrial Revolution, which corresponded with colonization), and charity is often hard to find at that stage.

Excellent insight about early charity being harder to find.

H9. Giffen goods, which the demand for increases as the price increases, are a controversial topic in economics. Pseudo-Giffen goods can exist at certain times: for example, suppose a poor family's staple food is soup, the cheapest food they can afford. If the cost of living suddenly rises, they will actually consume more soup, because the other foods that would normally be included in their diet are also more expensive (bread, meat, vegetables) and soup is still the least expensive choice of food. This is not really a Giffen good--it is simply the substitution effect--but it is easy to see how one could be deceived by someone with an agenda.

Excellent.

H10. People always want to acquire as much as possible with as little effort as possible, maximizing their consumer surplus. Therefore, if two identical widgets are for sale at $10 and $15, respectively, any rational person will purchase the $10 one, as it gives them another $5 to use for something else. If they want more than one, they can spend $30 and get three rather than two by purchasing the cheaper ones.

Superb, will use as a model answer.

12. These two goods are not perfect substitutes: you always require at least one of each good. Suppose that good X is hamburgers and good Y is hotdogs. If you have four total you can either have two of each, or one and three of each, or visa versa. You cannot have four of one, because the curves never intersect either axis.

Can have 1 and 3, but that brings no more utility than 1 and 1. These are perfect complements. (Plus 1 out of 2).

110/110. Highest score in the class so far. Congratulations!!!