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final_review_qa - Microeconomics Final Exam Review...

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Microeconomics Final Exam Review Questions 1. Suppose you have two goods, ice cream and Kraft Macaroni and cheese (an inferior good to most people). Show graphically what happens when 1) the price of the ice cream decreases and 2) your income increases. 2. A gardener states that for only $1 in seeds, she’s been able to grow over $20 in produce – an enormous profit. Do you agree or disagree with her? Explain. 3 a) Filene’s Basement, a local Boston discount department store, sells a wide selection of household goods and clothing. The manager of household linens is facing an oversupply of queen size sheets and must decide whether or not to put them on sale during the month of November. While reading the Boston Globe over coffee this past Sunday, she saw that Mattress Discounters, a local mattress shop located down the street from Filenes, is having a gigantic sale on its queen size mattresses starting this weekend and continuing throughout the month. Explain in words what effect, if any, this should have on her decision about a sale on sheets. 3b) We know that the cross price elasticity of mattress prices on sheet demand is –1.5. According to the advertisement for the mattress sale, the store is reducing the price on its queen size mattress from $400 to $360. A quick phone call to the manager of Mattress Discounters reveals that last week they sold 50 mattresses at $400 per mattress. Filene’s currently sells 100 sets of queen size sheets per week at a price of $40 per set. How might the Filene’s household linens manager estimate what effect this sale will have on the demand for queen size sheets? Based on your calculations, what will be the effect on the quantity of sheets sold? You should assume that it is possible to buy fractions of sheets or mattresses. 3c) We also know that the price elasticity of supply for sheets is 2.5. Given your answer in part 1b), what will be the new price for queen size sheets sold at Filenes? Use a diagram to help explain your answer. 4a) Senator John Kerry lost the recent presidential election to President George Bush, continuing an era of utter stupidity and dangerous “Cowboyism” in the highest and most powerful elected office of the United States. Shamed by his inability to win and saddened at the prospect of another four years under this moronic president, Kerry has retreated to Boston. More specifically, he has decided to drink and eat his worries away at the Legal Seafood restaurant located in Kendall Square. Kerry’s utility is defined by the following utility function: U(SA, CC) = 10 LN(SA) + 2 LN(CC)
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Where SA = pints of Samuel Adams Beer and CC = bowls of Legal Seafood’s famous clam chowder. Surveying the remainder of his campaign war chest, Kerry has found that his income for the next week is $100. According to the prices of the Legal Seafood menu,
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