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Chapter 6: Q.13 (page 152)
Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?
I considered my projected future earnings and decided that getting a phone that was the greatest option for me, which is exactly what I was thinking when I purchased the phone.
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If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?
A person who consumes wine and cheese gets a raise, so his income increases from \(3,000 to \)4,000. Show what happens if both wine and cheese are normal goods. Now show what happens if cheese is an inferior good.
Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?
The price of cheese rises from \(6 to \)10 per pound, while the price of wine remains \(3 per glass. For a consumer with a constant income of \)3,000, show what happens to consumption of wine and cheese. Decompose the change into income and substitution effects.
Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla鈥檚 budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in the marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla鈥檚 utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers
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