Homework 2 Answer Key

Homework 2 Answer Key - Econ 1101-38 Homework 2 Consumers...

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Econ 1101-38 Homework 2 – Consumer’s Choice Due Wednesday, October 18 th , 2006 Correct answers in bold. Be sure to read the syllabus to review policies on homework. Homework is due at the beginning of recitation. Be sure to label all graphs. Be clear and concise. In general an answer longer than two sentences is a bad answer. Question 1: David Hume loves donuts and measuring his own utility. Suppose he made the following table which lists the amount of money he is willing to pay for different amounts of donuts: Donuts Willing to Pay 0 $0.00 1 $5.00 2 $8.00 3 $9.45 4 $10.70 5 $11.85 6 $12.95 7 $14.00 8 $14.95 9 $15.85 10 $16.70 Suppose that the cost of a donut is $1. a) Draw David’s total cost and total utility curves on the same graph. (2 points for a fully labeled and correctly plotted graph. 1 point for some errors, 0 if nothing is right) .
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$0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 0 2 4 6 8 10 12 Burritos Total Utility Total Cost b) Make a new table with David’s marginal utility, marginal cost, and consumer surplus. Donuts Marginal Utility Marginal Cost Consumer Surplus 1 $5.00 $1.00 $4.00 2 $3.00 $1.00 $6.00 3 $1.45 $1.00 $6.45 4 $1.25 $1.00 $6.70 5 $1.15 $1.00 $6.85 6 $1.10 $1.00 $6.95 7 $1.05 $1.00 $7.00 8 $0.95 $1.00 $6.95 9 $0.90 $1.00 $6.85 10 $0.85 $1.00 $6.70 c) At which point or points is David’s consumer surplus highest? David’s consumer surplus is highest at 7 donuts.
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d) Draw David’s marginal utility and marginal cost curves on the same graph. What number of donuts will David choose if he sets MU=MC (and he can only have whole donuts)? $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 0 2 4 6 8 10 12 Burritos Marginal Utility Marginal Cost David will chose 7 donuts because that’s the highest number of donuts where MU>=MC. e) Assume David chooses this number of donuts. What is his total expenditure on donuts? Total Expenditure = Price x Quantity = $1 x 7 donuts = $7
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Now suppose that the cost of a donut is $1.50. Redo parts a-e for this price. $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 0 2 4 6 8 10 12 Burritos Total Utility Total Cost Donuts Marginal Utility Marginal Cost Consumer Surplus 1 5.00 $1.50 $3.50 2 3.00 $1.50 $5.00 3 1.45 $1.50 $4.95 4 1.25 $1.50 $4.70 5 1.15 $1.50 $4.35 6 1.10 $1.50 $3.95 7 1.05 $1.50 $3.50 8 0.95 $1.50 $2.95 9 0.90 $1.50 $2.35 10 0.85 $1.50 $1.70 David’s consumer surplus is highest at 2 donuts.
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$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 0 2 4 6 8 10 12 Burritos Marginal Utility Marginal Cost David will chose 2 donuts because that’s the highest number of donuts where MU>=MC.
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This note was uploaded on 01/19/2010 for the course ECON 6140 taught by Professor Stengos during the Spring '10 term at University of Guelph.

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Homework 2 Answer Key - Econ 1101-38 Homework 2 Consumers...

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