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Homework2.200 - Ryan Oprea Econ 200 Fall 2008 Homework#2...

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Ryan Oprea Econ 200, Fall 2008 Homework #2 This homework is due on October 29 at the beginning of class. You may consult with others on the homework, but must turn in your own work (i.e. please don’t copy homework from others) and must list who you worked with on the homework. If there is insufficient information to answer a question, state a reasonable assumption that allows you to do so and use it when working through the problem. 1. (40 points) Suppose Bob and Tom consume books and money left over (i.e. purchasing power on other goods). Bob’s utility function is U bob = x books + x m while Tom’s utility function is U tom = 5 x books + x m . Bob is wealthy with an income of $50 while Tom is less wealthy with an income of $25. (a) Derive a demand function for books for both Bob and Tom. (b) Suppose Bob and Tom can either own zero books or one book. Derive the willingness to pay for a book for both Bob and Tom. Construct the “industry” demand curve for books. (c) If only one unit was for sale, which would get the unit and what can we say about prices and consumer surplus? (d) Who prefers books more strongly Bob or Tom? Who has higher consumer surplus? Does higher willingness to pay imply stronger preferences in this example?
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