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Homework3Solutions.S2008

# Homework3Solutions.S2008 - Econ 10011/20011 Principles of...

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Econ 10011/20011: Principles of Microeconomics Answer Key for Homework #3 1. Based on her current habits, Julia's marginal rate of substitution of jigsaw puzzles per month (p) for books per month (b) (MRS pb ) is equal to 1.2. a. Which is larger, her marginal utility of puzzles or her marginal utility of books? Why? Puzzles, since MRS pb = MU p /MU b is greater than 1. b. What is her marginal rate of substitution of books for puzzles? MRS bp = MU b /MU p = 10/12 = 5/6 c. If Julia reads more books and works fewer puzzles each month (without changing her overall level of utility), how will her marginal rate of substitution of puzzles for books change? Why? Her MRS pb will rise due to the property of diminishing marginal rates of substitution (going in the opposite direction). Julia will be willing to give up even more books to get an extra puzzle. 2. Back in the 1970s, Coors beer was not sold in stores east of the Mississippi and Strohs was not sold west of the Mississippi. It was not uncommon for people from Chicago on vacation in the west to take cases of Strohs and return with cases of Coors. Suppose Richie from Chicago is willing to exchange 7 cases of Coors for 3 cases of Strohs. a. From which brand of beer does Richie get higher marginal utility? Strohs b. What is Richie's marginal rate of substitution of cases of Coors for cases of Strohs, MRS cs ? MRS cs = MU c /MU s = 3/7 c. After just getting back from a trip during which Richie exchanged Coors for Strohs, he finds out that he has to make another trip out west. How is his marginal rate of substitution of Coors for Strohs likely to change if the two brands are not considered to be perfect substitutes?

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