Micro Homework #1

# Micro Homework #1 - cups of tea to give up one cup of...

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Homework 1 Which of the following is False? a) Rightward shift in demand + unchanged supply curve = higher equilibrium price and larger equilibrium quantity b) Rightward shift in demand + Rightward shift in supply curve = lower equilibrium price and smaller equilibrium quantity c) Leftward shift in supply + unchanged demand curve = higher equilibrium price and smaller equilibrium quantity d) Leftward shift in demand + unchanged supply curve = lower equilibrium price and smaller equilibrium quantity Answer: B Rightward shift in supply + unchanged demand curve = lower equilibrium price and larger equilibrium quantity At a consumer’s interior optimum solution, which of the following will not necessarily hold true? e) x y MU MU = . f) x x y y MU P MU P = . g) , x x y y MU MRS MU = . h) , x x y y P MRS P = . Answer: A Suppose that a consumer considers coffee and tea to be perfect substitutes, but he requires two
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Unformatted text preview: cups of tea to give up one cup of coffee. This consumer’s budget constraint can be written as 2.5 10 C T + = . What should the consumer buy? Answer: Since 2 cups of tea have to be given up for 1 cup of coffee, we know that utility can be expressed as U=T + 2C and MU T = 1 and MU C = 2. We can also deduce from the budget constrain that P T = 1 and P C = 2.5. When we plug in the numbers for MU T / P T and MU C / P C , we see that the marginal utility per price for tea (1) is higher than the one for coffee (.8). Thus, the consumer can reach the highest utility (10) within the budget (\$10) by buying 10 cups of tea and no coffee. This also means that the basket is located at a corner point....
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