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Chapter 4: Q4. (page 165)

Jane always gets twice as much utility from an extraballet ticket as she does from an extra basketball ticket,regardless of how many tickets of either type she has. Draw Jane鈥檚 income-consumption curve and her Engel curve for ballet tickets.

Short Answer

Expert verified

The income-consumption curve is given below:

The Engel curve for ballet tickets is given below:

Step by step solution

01

Explanation of the graphs

Basketball and ballet tickets for Jane will be considered as substitute goods. It is mentioned that Jane gets two times more utility from an extra ballet ticket than from an extra basketball ticket.

Jane will choose ballet tickets if the price is less than or equal to twice the price of basketball tickets. However, if ballet tickets are more than twice the price of basketball tickets, she will choose basketball tickets.

  • The income consumption curve is given below:

The income consumption curve of Jane would be lying on either of the two-axis, depending upon the prices of the tickets and what she chooses.

The graph above shows the units of ballet tickets taken on the y-axis and units of basketball tickets taken on the x-axis. The income consumption curve is the two arrows along the y and x-axis depicting that Jane can choose any one, since both basketball and ballet are substitutes.

  • The Engel Curve is given below:

In the graph above, income is taken along the y-axis and units of ballet tickets on the x-axis. The upward-sloping Engel curve shows the relationship between income and demand/consumption. The higher the income, the greater will be the demand for ballet tickets.

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Most popular questions from this chapter

Suppose the income elasticity of demand for food is0.5 and the price elasticity of demand is -1.0. Suppose also that Felicia spends \(10,000 a year on food, the

price of food is \)2, and her income is \(25,000.

a. If a sales tax on food caused the price of food to increase to \)2.50, what would happen to her consumption of food? (Hint: Because a large price change is involved, you should assume that the price elasticity measures an arc elasticity, rather than a point elasticity.)

b. Suppose that Felicia gets a tax rebate of $2500 to ease the effect of the sales tax. What would her consumption of food be now?

c. Is she better or worse off when given a rebate equal to the sales tax payments? Draw a graph and explain.

a. Orange juice and apple juice are known to be perfect substitutes. Draw the appropriate price consumption curve (for a variable price of orange juice) and income-consumption curve.

b. Left shoes and right shoes are perfect complements. Draw the appropriate price-consumption and income-consumption curves.

By observing an individual鈥檚 behavior in the situations outlined below, determine the relevant income elasticities of demand for each good (i.e., whether it is normal or inferior). If you cannot determine the income elasticity, what additional information do you need?

a. Bill spends all his income on books and coffee. He finds \(20 while rummaging through a used paperback in at the bookstore. He immediately buys a new hardcover book of poetry.

b. Bill loses \)10 he was going to use to buy a double espresso. He decides to sell his new book at a discount to a friend and use the money to buy coffee.

c. Being bohemian becomes the latest teen fad. As a result, coffee and book prices rise by 25 percent. Bill lowers his consumption of both goods by the same percentage.

d. Bill drops out of art school and gets an M.B.A. instead. He stops reading books and drinking coffee. Now he reads the Wall Street Journal and drinks bottled mineral water.

Two individuals, Sam and Barb, derive utility from the hours of leisure (L) they consume and from the amount of goods (G) they consume. In order to maximize utility, they need to allocate the 24 hours in the day between leisure hours and work hours. Assume that

all hours not spent working are leisure hours. The price of a good is equal to $1 and the price of leisure is equal to the hourly wage. We observe the following information about the choices that the two individuals make:

Graphically illustrate Sam鈥檚 leisure demand curve andBarb鈥檚 leisure demand curve. Place price on the vertical axis and leisure on the horizontal axis. Given that they both maximize utility, how can you explain the difference in their leisure demand curves?

Suppose you are in charge of a toll bridge that costs essentially nothing to operate. The demand for bridge crossingsQis given byP= 15 - (1/2)Q.

a. Draw the demand curve for bridge crossings.

b. How many people would cross the bridge if there were no toll?

c. What is the loss of consumer surplus associated with a bridge toll of \(5?

d. The toll-bridge operator is considering an increase in the toll to \)7. At this higher price, how many people would cross the bridge? Would the toll-bridge revenue increase or decrease? What does your answer tell you about the elasticity of demand?

e. Find the lost consumer surplus associated with the increase in the price of the toll from \(5 to \)7.
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