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Midterm Review Questions

# Midterm Review Questions - Midterm Review Homework...

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Midterm Review Homework Assignment 5 1. Max enjoys windsurfing (W) and snorkeling. He obtains the following total utility from each of these sports: Half-hours (per month) TU W MU TU S MU S 1 60 20 2 110 38 3 150 53 4 180 64 5 200 70 6 206 75 7 211 79 8 215 82 9 218 84 (a) Calculate Max’s marginal utility from windsurfing and from snorkeling. (You may add this information to the above table with columns for the MU for windsurfing and the MU for snorkeling. (b) If Max has \$35 to spend, and equipment for windsurfing rents for \$10 per half-hour, while snorkeling equipment rents for \$5 per half-hour, how long will Max choose to windsurf? Snorkeling? Why? (c) What is Max’s budget constraint? Explain verbally and write the equation for his budget constraint below. (d) Now, suppose Max’s sister gives him \$20 to send on his leisure pursuits, so he now has \$55 to spend. How long will Max windsurf? Snorkeling? (e) If Max has \$55 to spend and the rent on windsurfing equipment is cut to \$5 per half-hour, how will Max now spend his time windsurfing? Snorkeling?

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Additional Problem 1 : Utility Analysis Assume that Maxi Mizer is trying to decide which combination of ice cream cones, Good A, and magazines, Good B, she should purchase with her limited income of \$20. Maxi's preferences for ice cream cones and magazines, Goods A and B, are given in the table below. Further assume that the prices of ice cream cones and magazines, Goods A and B, are \$2 and \$4 respectively. (You may use the front and back of this page to complete your answer. Marginal Utility of Marginal Utility of Unit of Good Ice Cream Cones (A) Magazines (B) 1 20 48 2 16 40 3 14 36 4 12 32 5 10 24 6 8 12 7 6 8 a) How many ice cream cones and magazines will Maxi purchase? . Why? (You must show all work to receive full credit). b) Now assume that the price of magazines falls to \$2. How many ice cream cones and magazines will Maxi purchase now? (You must show all work to receive full credit). c) On the basis of the information determined this far, determine the demand curve for magazines. Provide a graph of the demand for magazines.
Does the demand for magazines follow the "law of demand"? (Yes;No) Give reasons to explain the "law of demand" and explain them briefly.

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