Econ_101_HW_06_ch_10_11_12_Fall_2011

Econ_101_HW_06_ch_10_11_12_Fall_2011 - Economics 101 Name:...

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Economics 101 Name: Fall 2011 Homework #6 (Chapters 10, 11 & 12) Due Thursday, October 13, 2011 Each question is worth 2 points. Total 108 points plus 5 extra credit. Maximum score is 113 points, but 100 points is considered full credit. Anything over 100 is extra credit. Refer to the table for Problem 3 at the top of page 268 in the textbook and use the information to answer questions 1 to 8. For questions 1 to 3 , Brenda has $8 of income to spend on bagels and coffee. Bagels cost $2 each and coffee costs $2 per cup. 1. Which bundles are on Brenda’s budget line? 2. For each of the bundles you identified in question 1, indicate the level of utility (in utils) that Brenda enjoys. (Put your answer above under Question 1.) 3. Which bundle is Brenda’s optimal bundle? For questions 4 and 5 , Brenda still has $8 of income to spend, but now the price of bagels has gone up. Bagels now cost $4 each and coffee still costs $2 per cup. 4. Which bundles are on Brenda’s budget line now, and what is the level of utility (in utils) that Brenda enjoys for each bundle? 5. Which bundle is Brenda’s optimal bundle now? 6. What do your answers to questions 3 and 5 imply about the slope of Brenda’s demand curve for bagels? In other words, consider how many bagels she buys at each price and use that information to consider what this indicates about the slope of her demand curve.
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7. When the price increases from $2 to $4 per bagel, what impact does the substitution effect have on Brenda's consumption of bagels? a. Increased consumption b. Decreased consumption c. Consumption stays the same 8. Assuming bagels are a normal good for Brenda, when the price increases from $2 to $4 per bagel, what impact does the income effect have on Brenda's consumption of bagels? a. Increased consumption b. Decreased consumption c. Consumption stays the same ----------------------------------------------------------------------------------------------------------- Use the following information to answer questions 9 to 14 : Ed spends a large portion of his income on his children’s education. He considers education to be a normal good. Because tuition fees rise, one of his children has to withdraw from college. 9. Describe the substitution effect. 10. Describe the income effect. 11. Is the income effect likely to be significant for Ed? Why or why not? 12. In which direction does Ed’s purchases of college education move as a result of the substitution effect? a. Increased consumption b. Decreased consumption c. Consumption stays the same 13. In which direction does Ed’s purchases of college education move as a result of the income effect? a. Increased consumption b. Decreased consumption c. Consumption stays the same
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14. Do the substitution and income effects counterbalance each other or reinforce each other? a.
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Econ_101_HW_06_ch_10_11_12_Fall_2011 - Economics 101 Name:...

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