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CSUN ECON 500 - Demand: the Benefit Side of the Market

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ECON 500 – Spring 2007 Chapter 5 – “Demand: The Benefit Side of the Market” Questions from the textbook: Review questions 2 and 5 (page 145). Problems 2, 3, 4, 7, 8, 9, and 10 (pages 146-147). “Appendix Problems” 1, 2, 3, 4, 5, and 6 (pages 161-162) Additional problems: 1) Suppose )5,2(),(21=pp and 100=I . Determine if each of the following bundles is or is not affordable: a. )20,50(),(21=xx . b. )10,25(),(21=xx . c. )6,30(),(21=xx . d. )12,20(),(21=xx . e. )0,50(),(21=xx . f. )20,0(),(21=xx . 2) Caleb spends his entire income of I on goods 1x and 2x . Each unit of 1x costs 1p and each unit of 2x costs 2p. a. Graphically illustrate his “budget constraint.” b. Explain how is budget constrain will change if: b.i. 1p increases (with I and 2p fixed). b.ii. 2p decreases (with I and 1p fixed). b.iii. I increases (with 1p and 2p fixed). b.iv. 1p and 2p both increase by 10% (with I fixed). b.v. 1p , 2p , and I all increase by 8.275% 3) Mo preferences are “transitive.” Comparing 4 different bundles - A, B, C , and D - he states: BAf, BD f, and CB f . Based upon this information alone, is it possible to compare: a. bundles A and C ? Explain. b. bundles C and D ? Explain. c. bundles A and D? Explain.4) Gene preferences are summarized by the utility function 212)( xxXu = . His marginal utility for each good is 212 xMU = and 212xxMU =. a. Identify 3 different consumption bundles which give Gene “20 units of happiness.” Identify 3 different consumption bundles which give Gene “40 units of happiness.” b. Sketch the indifference curves through the consumption bundles identified in part (a). c. Are his indifference curves “downward sloping”? Explain. d. Are his indifference curves “convex to the origin”? Explain. e. Is the indifference curve for “20 units of happiness” further from the origin or closer to the origin than the indifference curve for “40 units of happiness”? Explain. 5) Karen has preferences that can be represented by 2110)( xxXu =. Her marginal utility for each commodity is 2110xMU= and 1210xMU = . Suppose each unit of 1x costs 1p and each unit of 2x costs 2p . Her income is equal to I. a. State an expression for 2,1MRS. Are her indifference curves “convex to the origin”? Explain. b. State two conditions that Karen’s “optimal consumption bundle” must simultaneously satisfy. c. Determine optimal levels of consumption as functions of 1p , 2p , and I. d. Redo parts (a), (b), and (c) if instead Karen’s preferences are represented by 212)( xxXu = (in which case 121xxMU = and 212xxMU =). 6) Consider a market in which demand is given by the linear function ppD 500000,10)( −= . a. Determine the value of Consumers’ Surplus at a price of 10=p . b. Determine the value of Consumers’ Surplus at a price of 15=p . c. Graphically illustrate the change in Consumers’ Surplus, as price is increased from 10=p to 15=p . d. Derive a general expression for the value of Consumers’ Surplus as a function of price. e. Using the function which was derived in part (d), argue that the value of Consumers’ Surplus is inversely related to price (that is, CS must always increase whenever price is


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CSUN ECON 500 - Demand: the Benefit Side of the Market

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