E202Exam1.11

# E202Exam1.11 - compare the respective values of marginal...

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Answer : The supply of diamonds is close to perfectly inelastic (vertical line) due to finite supply, whereas the supply of water is close to perfectly elastic (horizontal line) due to renewable supply. Chapter 5 11. (6 pts) Professor Glass gets a total of 200 utils per month from consuming 2 pints of Blue Bell Cookies and Cream Ice Cream and a total of 200 utils per month from consuming 2 pints of Blue Bell Mint Chocolate Chip Ice Cream. The price of the ice cream is \$2 per pint, regardless of flavor. Is she maximizing her utility? If so, explain how you know. If not, how should she rearrange her spending? Answer : The information given enables us to conclude that Professor Glass’s average utility per dollar is the same for both flavors of ice cream. But this information does not enable us to say whether her current combination of the two flavors is optimal. To do that, we must be able to
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Unformatted text preview: compare the respective values of marginal utility per dollar. [Of course, I always maximize utility.] 12. (10 pts) For the demand curve shown, find the total amount of consumer surplus that results in the ice cream market if ice cream sells for \$2 per pint (and draw on graph ). Find the total amount of consumer surplus if ice cream sells for \$1 per pint and the change in consumer surplus (and draw both on graph ). Answer : If ice cream sells for \$2 per pint, consumer surplus is (1/2)(6,000 pints/ month) (\$3/pint) = \$18,000/month. If ice cream sells for \$1 per pint, consumer surplus is (1/2)(8,000 pints/month) (\$4/pint) = \$32,000/yr. Consumer surplus has risen by \$14,000/month....
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