SupQuestions3

# SupQuestions3 - Short Questions from Lesson I-5 Rational...

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Short Questions from Lesson I-5: Rational Consumers, and Lesson I-6: Manipulating Consumers 1 Short Questions and Answers from Lesson I-5: Rational Consumers, and Lesson I-6: Manipulating Consumers 1. Airlines give away millions of tickets each year through their frequent flyer programs, with the typical airline awarding a free ticket for each 25,000 miles flown on the airline. The average airline ticket costs \$500 and is for a 2,500-mile round trip. Given this information, evaluate the following statement: Airlines could have the same effect on demand by eliminating their frequent flyer programs and simply lowering the average ticket price by 10 percent. The statement is false. The frequent flyer programs are, in effect, a "buy 10 tickets, get one free" deal. The price of the first 10 tickets remains unchanged under the deal, while the price of the 11th ticket is zero. 2. Natalie is always willing to give up 10 ounces of licorice for 1 ounce of chocolate. Mitchell, on the other hand, will always give up 10 ounces of chocolate for 1 ounce of licorice. Based on this information, answer the following questions: a. Do Natalie's preferences exhibit a diminishing marginal rate of substitution between chocolate and licorice? Why or why not? b. Assuming that Natalie and Mitchell have the same amount of money to spend on chocolate and licorice, who will purchase the most licorice? Why? a. No, since she is always willing to give up the same amount of chocolate for an additional ounce of licorice. b. Other things equal, Mitchell will consume more licorice. More precisely, if we graph licorice on the horizontal axis and chocolate on the vertical axis, Mitchell's indifference curves are always steeper than Natalie's. For given prices and income, this means that Mitchell will never consume less licorice than Natalie. 3. Suppose an individual's marginal rate of substitution is three slices of pizza for one beer at the present bundle of beer and pizza she is consuming. If the price of beer is \$1.00 and the price of a slice of pizza is \$1.50, is the consumer maximizing her welfare? If not, how should she change her consumption? Since the ratio of beer prices to pizza prices is \$1/\$1.5 = 2/3 < 3 = MRS, the consumer is not maximizing her welfare. She should consume less pizza but more beer to maximize her welfare.

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Short Questions from Lesson I-5: Rational Consumers, and Lesson I-6: Manipulating Consumers 2 4. Clothing stores frequently run "sales" where they discount clothing prices by as much as 25 percent. What impact, if any, would you expect these "sales" to have on a store that specializes in selling shoes produced by Rockport? Since shoes and clothing are probably gross complements, "sales" at clothing stores most likely lead to increased shoe purchases at Rockport shoe stores. 5.
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SupQuestions3 - Short Questions from Lesson I-5 Rational...

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