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IVC
Irvine Valley College
Please answer these questions clearly and neatly. Show your work.
1.
.
Homework – Utility
Economics 1
Mark Mc Neil
Assume that you live in a world in which you can purchase only two goods (a two good
world) - boats or villas. The price of a boat is $5 million and the price of a villa is $10
million. The utility schedules for these goods are shown in the table below. Assume that
your parsimonious parents only allow you an income of $75 million.
Boats
Villas
Total
Utility
0
210
390
545
680
790
880
955
1015
1060
1090
a.
b.
Marginal
Utility
MU/$
(P=$5)
Quantity
Total
Utility
0
1
2
3
4
5
6
7
8
9
10
0
300
550
750
900
1020
1120
1180
1220
1240
1250
Marginal
MU/$
Utility
(P=$10 )
MU/$
(P=$5)
Complete the marginal utility and marginal utility per dollar columns.
Given your income of $75 million, and assuming that the price of boats is $5 million and
the price of villas is $10 million, what is the utility maximizing quantities of boats and
villas?
Boats__________Villas__________
c.
Assume that the price of villas changes from $10 million to $5 million. What will be the
utility maximizing quantities of boats and villas?
Boats__________Villas__________
d.
How many villas does this consumer buy when the price was $10 million? $5 million?
Is this behavior consistent with the (iron, to you) law of demand? Plot this consumer's
demand curve for good B.
Economics 1
Utility Exercises b
Page
Price
P
Quantity
$10.00
5.00
Q
e. How much income would this consumer need to buy the same number of items as in
section b above now that the price of villas is only $5 million?
$________________million
If this consumer had this amount of income, would the consumer still buy the same
number of villas as in section b above? Explain.
2.
a. Clearly define and explain the term "consumer surplus".
b. Clearly define and explain the term "producer surplus".
c. Clearly define and explain the term deadweight loss (excess burden).
d. What is wrong with deadweight loss? (That is, why do economists hate deadweight loss?)
2
Economics 1
Utility Exercises b
Diagram A
3
Diagram B
P
P
Page
S1
S
tax
200
S1
150
P1
100
D1
Ø
Q
1
Q
50
Ø 20 30 40 50 60 70
D1
Q
d. Use diagram A to show the area of consumer surplus, and the area of producer surplus.
e. Use diagram B to show the effects of a per unit tax placed on this good.
Show the amount of tax collected, and the area of deadweight loss.
f. Calculate the amount of deadweight loss.
3.
Each week Priscilla Presley spends all her income on two goods: cocoa butter and chili fries.
Each week she buys 3 packages of cocoa butter and 12 orders of chili fries. On the last order
of cocoa butter she received 240 marginal utils and on the last order of chili fries, she
received 36 marginal utils. The price of cocoa butter is $8 and the price of an order of chili
fries is $2.
a. What is the utility maximizing rule?
b. Has Priscilla Presley maximized her utility? Explain. (If not, what more should she buy
more of and what should she buy less of?)