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Chapter 6: Q.7 (page 152)
Would you expect the marginal utility to rise or fall with the additional consumption of a good? Why?
Yes, marginal utility falls with each additional unit of consumption.
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1. Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \(2 in gasoline money. He has a total of \)10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points on Jeremy鈥檚 consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.
As a general rule, is it safe to assume that a change in the price of good will always has its most significant impact on the quantity demanded of that good, rather than on the quantity demanded of other goods? Explain
Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?
The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called 鈥渃losing the Washington Monument.鈥� When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of diminishing marginal utility why the Washington Monument strategy is so misleading. Hint: If you are really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or the lowest marginal utility?
Maya divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.
a. Show the effect of the frost on Maya鈥檚 budget constraint.
b. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the substitution effect outweighs the income effect for croissants.
c. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the income effect outweighs the substitution effect for croissants.
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