Review question for chpt8 Hoursper dayTotal utilityfromwindsurfingTotal utilityfromsnorkeling1 120 402 220 763 300 1064 360 1285 396 1406 412 1507 422 158Max enjoys windsurfing and snorkeling. Max has $35 a day to spend, and he can spend as much timeas he likes on his leisure pursuits. The price of renting equipment for windsurfing is $10 an hour andfor snorkeling is $5 an hour. The table shows the total utility Max gets from each activity.1. Which does Max enjoy more: his 6th hour of windsurfing or his 6th hour of snorkeling?Explain, (hint: calculate his marginal utility)Max’s marginal utility from his 6th hour of windsurfing is 16 and his marginal utility from his 6th hour of snorkeling is 10. Max enjoys his 6th hour of windsurfing more than his 6th hour of snorkeling.2. Make a table that shows the various combinations of hours spent windsurfing and snorkelingthat Max can afford. List Max’s marginal utility per dollar from windsurfing and fromsnorkeling.3. HowmanyhoursdoesMaxwindsurfand howmany hours does he snorkel to maximize his utility? To maximize his utility, Max windsurfs for 3 hours and snorkels for 1 hour.Max uses his $35 so that all of the $35 is spent and so that the marginal utility per dollar from each activity is the same. The marginal utility from the third hour of windsurfing is 80 and the rent of the windsurfing equipment is $10 an hour, so the marginal utility per dollar from windsurfing is 8. The marginal utility from the first hour of snorkeling is 40 and the rent of the snorkeling equipment is $5 an hour, so the marginal utility per dollar from snorkeling is 8. The marginal utility per dollar from windsurfing equals the marginal utility per dollar from snorkeling.HourswindsurfingMarginalutility perdollar fromwindsurfingHourssnorkelingMarginalutility perdollar fromsnorkeling3 8.0 1 8.02 10.0 3 6.01 12.0 5 2.40 7 1.64. If Max spent a dollar more on windsurfing and a dollar less on snorkeling than in part (a), byhow much would his total utility change?If Max windsurfs another hour, he pays $10 and gains 60 units of utility (the marginal utility from the 4th hour), which is 6.0 units of utility per dollar. So if he spends a dollar more on windsurfing, his utility from windsurfing increases by 6.0. If he spends an hour less on snorkeling, he saves $5 and loses 40 units of utility (the marginal utility from the 1st hour of snorkeling), which is 8.0 units of utility per dollar. So if he spends a dollar less on snorkeling, he loses 8.0 units of utility. Overall, spending a dollar more on windsurfing and a dollar less on snorkeling lowers Max’stotal utility by 2.0 units of utility.5. Max is offered a special deal: The price of renting windsurfing equipment is cut to $5 an hour.How many hours does Max spend windsurfing and how many hours does he spendsnorkeling? Draw Max’s demand curve for renting windsurfing. Max will now maximize his total utility by spending 5 hours windsurfing and 2 hours snorkeling. This combination of windsurfing and snorkeling uses all of Max’s income and sets themarginal utility per dollar fromwindsurfing equal to the marginalutility per dollar from snorkeling.When the price of renting windsurfingequipment is $10 per hour, Max rentswindsurfing equipment for 3 hours. When the price of renting windsurfingequipment is $5 per hour, Max rentswindsurfing equipment for 5 hours.These points lead to the demandcurve in Figure 8.2. 6. Draw Max’s demand curve forwindsurfing when his income increasesfrom $35 to $55. To maximize his utility, Maxwindsurfs for 4 hours andsnorkels for 3 hours. Max useshis $55 such that all of the$55 is spent and marginalutility per dollar for eachactivity is the same. WhenMax windsurfs for 4 hours and snorkels for 3 hours, he spends $40 renting the windsurfing equipment and $15 renting the snorkeling equipment—a total of $55. The marginal utility from the fourth hour of windsurfing is 60 and the rent of the windsurfing equipment is $10 an hour, so the marginal utility per dollar from windsurfing is 6. The marginal utility from the third hour of snorkeling is 30 and the rent of the snorkeling equipment is $5 an hour, so the marginal utility per dollar from snorkeling is 6. The marginal utility per dollar from windsurfing equals the marginal utility per dollar from snorkeling.Max’s demand for rented windsurfing equipment increases. The quantity of windsurfing equipment rented at $10 per hour increases from 3 hours (problem 8 (a)) to 4 hours (this problem). Max’s demand curve for rentedwindsurfing equipment shifts rightward as shown in Figure 8.3 by the shift from D1 to D2. 4) The figure above shows the market for gasoline. The government has imposed a tax on gasoline.a) What is the amount of the tax per gallon of gasoline?b) How much of the tax is paid by consumers? How much is paid by producers? Which is more elastic, the supply or demand for gasoline?Answer: a) The tax is $1.50 per gallon, the amount by which the supply curve has been shifted upward.b) Consumers pay $1 of the tax, as the price they pay rises from $1.50 to $2.50 per gallon. Producers pay $0.50 of the tax, as the price they receive falls from $1.50 to $1.00 per gallon. The supply is more elastic because suppliers pay a smaller fraction of the tax than do buyers.Topic: Tax IncidenceSkill: AnalyticalQuestion history: Previous edition, Chapter 6AACSB: Analytical Skills5) The figure above shows the market for a life-saving drug. Suppose the government imposes a $150 tax per dose on sellers of the drug. Show and describe the impact on the market. Who pays this tax?Answer: The tax decreases the supply and shifts the supply curve leftward. As shown in the figure, the vertical difference between the old supply curve and the new one is the amount of the tax, $150 per dose. The price of the drug rises from $150 per dose before the tax to $300 per dose after the tax. The quantity remains constant, at 8,000 does per month. Because demand is perfectly inelastic, the price rose by the full amount of the tax so buyers pay the entire taxTopic: Tax Incidence and the Elasticity of DemandSkill: AnalyticalQuestion history: Previous edition, Chapter 6AACSB: Analytical Skills6) The figure above shows the market for tickets to the Super Bowl the day of the game. Suppose the government imposes an entertainment tax of $100 per ticket.a) What is the equilibrium price of a Super