Econ 100A-Spring 2008
Problem Set 2
Department of Economics
University of California
PROBLEM SET 2
Due: Thursday, February 21, 2008, 9:30 AM (in lecture)
I. TRUE or FALSE and EXPLAIN
If the price elasticity of demand for ballet tickets is around –1.2 in the local market, then the Zellerbach
theater will increase its ticket revenues if it increases ticket prices a small percentage amount, e.g., 5%.
Japanese consumers save significant amounts of their income even when their interest rates are nearly
zero, while facing much higher interest rates, American consumers save almost nothing.
One of these
two groups must violate one of the rationality assumptions of consumer preferences over consumption
If a Herschel has a
quasi-linear utility function
for potatoes and a composite good, then, assuming he is a
rational consumer, potatoes cannot be a Giffen good for him.
If the production of tortillas exhibits diminishing marginal returns, then tortilla production must also
exhibit decreasing returns to scale.
II. SHORT ANSWERS
Lily is working as a software developer, and she considers going back to school for a degree in medicine.
Her salary was $76,000 with an average increase of 1% annually.
Average salary for primary care
physician is about $110,000.
It takes 10 years for Lily to start earning the physician’s salary, and she has
to take out $250,000 student loans. Is a medical degree a good investment for Lily (aside from
considerations of job satisfaction and other non-monetary considerations)?
Srinagesh owns a sewing shop, and it’s time for him to upgrade his sewing machines.
He talks to his
friends and gets a really good deal for the new machines.
However, he decides to follow his consultant’s
advice to lease the machines and forgo the great deal.
Propose a possible explanation for his seemly
Gap wants to increase its sales in order to compete with Banana Republic, so Gap creates the new brand
name Old Navy with lower quality, less expensive jeans.
Gap expects that lower prices will lead to
higher sales, according to the Law of Demand.
However, it turns out that Gap’s sales go down instead of