Download Chapters20through21

Chapter 20
Consumer Choice

Answers to Even-Numbered Problems
2. To raise marginal utility, an individual would consume fewer pizzas. As long as marginal utility is
positive, however, the individual’s total utility is rising with the second pizza even though marginal
utility is falling.
4. The utility maximizing combination of banks of French fries and cheeseburgers that equates marginal
utility per dollar spent (at a marginal utility of 8 units of utility per dollar) and exhausts the total
$6 budget is two cheeseburgers and two bags of French fries.
6. When total utility is rising, the only thing we can say about marginal utility for certain is that it is
positive.
8. The student should compare the marginal utility per tuition dollar spent at the two universities.
Assuming that a “unit” of college is a degree, the student should divide the additional satisfaction
derived from a degree at each university by the total tuition it would take to earn a degree at each
institution. The university with the higher marginal utility per tuition dollar is the one the student
should attend.
10.
12. The table below displays the marginal utilities and the values of marginal utility per dollar spent at
a price of $2 per hot dog and a price of $60 per baseball game. The marginal utility per dollar spent is
equalized at a value of 5, which yields a consumer optimum of 4 hot dogs and 2 baseball games
per week, for which the consumer’s entire income of $128 is spent. Note that the marginal utility
per dollar spent is also equalized at 2.50 if 5 hot dogs and 3 baseball games are consumed, but the
individual has insufficient income for this weekly consumption combination.
Q
Hotdogs
MU
Per Hotdog
M
MU/$ Spent
Q
Baseball
Games
1
—
—
1
—
—
2
2
1
2
3
5
3
1
8
3
1
2
4
1
5
4
1
1
5
5
2
5
5
0
6
2
1
6
2
0
14. The price of good A is twice the price of good B, or $7.00 per unit.
MU
M
Baseball
Games MU/$ Spent
Chapter 21
Demand and Supply Elasticity

Answers to Even-Numbered Problems
2. The increase in tire prices from $50.00 to $60.00 is a 20 percent increase. Let X denote the expected
decrease in the quantity. Then X/20 percent  0.9. Hence, X  18 percent.
4. |[(200,000  100,000)/(300,000/2)]/[($10  $20)/($30/2)]|  1.0. Demand is unit-elastic.
6. (a)
(b)
(c)
(d)
Nearly perfectly elastic
Nearly perfectly inelastic
Nearly perfectly inelastic
Nearly perfectly elastic
8. Within the first range, demand is elastic. As price falls, therefore, total revenue rises and the total
revenue curve is increasing. Within the second range, demand is at first elastic and then inelastic.
When price falls, therefore, total revenue and the total revenue curve are initially rising. Eventually
total revenue and the total revenue curve reach the maximum point, which corresponds to the point
of unit elasticity. Beyond this point, total revenues decline.
10. Goods X and Y are substitutes, and goods X and Z are complements.
12. Income elasticity of demand is measured as the percentage change in demand divided by the percentage
change in income. A negative income elasticity of demand indicates that as income rises, demand
falls. This type of good is defined in Chapter 3 as an inferior good. A positive income elasticity of
demand, therefore, indicates that the good is a normal good, as defined in Chapter 3. Hence, we can
conclude that a hot dog is an inferior good and that lobster is a normal good.
14. Let X denote the percentage change in the volume of imports. Then X/  10 percent  2.0. Hence X,
the percentage change in imports, is  20 percent.
16. The short-run price elasticity of supply is 0.5, and the long-run price elasticity of supply is 1.5.