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211-1 PS4 F07

# 211-1 PS4 F07 - MMSS 211-2 Problem Set 4 Fall 2007 First a...

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MMSS 211-2 Problem Set 4 Fall 2007 First, a few extra problems on the consumer behavior material: 1. Suppose initially that when the price of gasoline is \$1 per gallon, you consume 1,000 gallons per year. Then, a couple of things change: 1) The price of gas doubles and 2) you win a contest which will pay you \$1,000 per year as long as you live. Ceteris paribus, are you better-off than you were before the changes? 2. Elise spends all of her income on two goods, X and Y. Last year, she bought 40 units of good X when P X = 30 and she bought 60 units of good Y when P Y = 50. If the prices this year are P X = 12 and P Y = 60 and her income now is 4080, will she be better-off this year than she was last year, ceteris paribus? 3. You live in a very small town and have access to only one store that rents DVD’s. It charges \$2 per rental. Your demand curve for DVD rentals is P = 40 – 2Q, where P is the rental price per day and Q is the number of movies demanded per year. What is the maximum annual fee that you would be willing to pay to join the movie club to be allowed to rent the DVD’s at the price given? Now, some problems on the behavior of firms: 4. Consider a firm faced with the following production technology: Q = F(K,L) = K 1/2 + L 1/2 .

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