Micro Homework #1.docx

Micro Homework #1.docx - 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 consumers 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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