pes16pset4sol

# pes16pset4sol - Principles of Economics W1105.002 Spring...

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Principles of Economics W1105.002 Spring 2016 Prof. Musatti Problem Set 4: Solutions 1. For his birthday, Dave likes to receive videogames and sports tickets. Dave’s marginal utility from a videogame is equal to 50 utils regardless of the number of vidoegames he receives while his marginal utility from a sports ticket diminishes with the number of tickets (Q ST ) according to the function MU CT = 100/Q ST . Suppose the price of a videogame is \$50 while the price of a sports ticket is \$40. With a budget of \$100, how many videogames and sport tickets should Dave’s friends buy for him? Would they spend their entire budget? Explain your reasoning. 1. Dave’s friends will buy two sports tickets and they will have \$20 left unspent. Dave’s friends should spend money on each item so as to equalize the marginal utility per dollar. The marginal utility per dollar spent on videogames is 1 util per dollar regardless of the number of videogames. The marginal utility per dollar spent on sports tickets is 2.5/Q ST utils per dollar. The two marginal utilities per dollar are equal when Dave’s friends buy 2.5 sports tickets. However, sports tickets can be purchased only in whole amounts and they will buy 2 sports tickets. 2. The table shows a piano manufacturer’s total cost of producing pianos. a. What is the manufacturer’s fixed cost (FC)? b. For each level of output, calculate the variable cost (VC). For each level of output except zero, calculate the average total cost (ATC) the average variable cost (AVC) and the marginal cost (MC).

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