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BPUB250
Problem Set3
Due: February 2223, 2012 in Class
Question 1
Suppose Tom has $20 and decides to go to the movies. A movie ticket costs him $8. He can
spend the rest of his money at the concession stand on popcorn (
c
) or Twizzlers (
t
). For this
problem treat
c
and
t
as continuously divisible. Popcorn costs $1/bag, and Twizzlers cost $p/box.
Tom’s utility function over popcorn and Twizzlers is:
U(c, t) =6c
0.5
t
0.5
(a)
Calculate Tom’s marginal rate of substitution. Calculate the demand functions for
popcorn and Twizzlers as a function of
p
.
For the rest of the question, assume that the original price of Twizzlers is $3/box. Suppose Tom
has a subsidy from the Movie Theater that gives him $1 dollar off the price of each box of
Twizzlers if he buys the movie ticket. He can buy as many boxes of Twizzlers with the subsidy
as he can afford.
(b)
After the subsidy, how much money would Tom need to attain the same utility as he had
when p=$3?
(c)
Calculate the Compensating Variation.
(d)
Calculate also the Equivalent Variation.
(e)
How much would this subsidy cost the Movie Theater, assuming Tom is the only
beneficiary?
(f)
Devise a program for the Movie Theater which spends the same amount of money, but
makes Tom happier. Make sure you show calculations that demonstrate Tom is indeed
happier under the new program.
Question 2
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This note was uploaded on 04/04/2012 for the course BPUB 250 taught by Professor Seim during the Spring '08 term at UPenn.
 Spring '08
 Seim

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