Problem Set 5

# Problem Set 5 - Econ. 221 1. Key to Selected Questions...

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Econ. 221 Key to Selected Questions Practice Problem Set 5(Chapter 9) 1 . As we move down a linear demand curve , price of the good in question falls. What happens to … a. total expenditure? Increases along the elastic segment, reaches a maximum at the unit elastic segment and thereafter falls along the inelastic segment. b. total utility? Increases c marginal utility? Decreases (obeys Law of Diminishing Marginal Utility) d. consumer surplus? Increases 2. Susan has \$90 to spend on Audio Book Rentals (A) at Earbooks and Computer Time (C) at the Internet Cafe. Audio rentals costs \$9 per audio book and computer time cost \$6 per hour a. Write the equation of her budget constraint using the numerical values for prices and income BC 0 : 9A + 6C = 90 b. Label this budget constraint BC 0 See graph c. What is the numerical value of the slope and what does this price ratio mean? Slope = -P C /P A = - 6/9 = - 2/3. It means that for an additional hour of computer time, Susan must give up 2/3 units of an audio book rental. d. If Susan is a utility maximizer, where will her optimal bundle lie and why? Susan’s optimal bundle lies on the budget line because as a utility maximizer, she must exhaust her income.

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## This note was uploaded on 05/10/2010 for the course ECON 221 taught by Professor Ramoo during the Spring '10 term at Diablo Valley College.

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Problem Set 5 - Econ. 221 1. Key to Selected Questions...

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