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Unformatted text preview: Name: Quiz 2 - Elements of Microeconomics (Spring 2011) [25 points] On Wednesday on the way to work at T-shirt Shop, where she makes $10/hour, Snooki finds $20 on the ground. Snooki likes to look pretty, so she spends all her money on tanning oil. a) [3] Draw Snooki’s budget constraint for two goods ~ leisure and tanning oil. Label any intercepts and slopes. CM g afifwj a») 1% Emissary/re a ,, w b) [2] On the graph above, draw a reaséhable indifference curve for Snooki showing her choosing to work 6 hours. c) [8] When Snooki gets to work, her boss, Danny, is shortstaffed and needs employees to work more. Danny offers Snooki the option of working after her normal shift (which is 6 hours) for a one—time bonus of $10 x; W _ A a r. a . \i, {E d) [4] Given the new wage sdhedufie, suppose that Snboki decides to work 8 hours. Draw an indifference curve showing Snooki working 8 hours on the graph above in part c). What will be Snooki’s income for this day (Wednesday) when she works 8 hours? Let’s call this income Yo. J «t 2% $w/léeef 82360 e) [8] The only consumption good Snookie buys is tanning oil. Snooki’s income on Wednesday is Y0 and suppose that her income on Thursday will be $100 and the interest rate is 10%. Draw her budget constraint for consumption of tanning oil on Wednesday and Thursday. Since Snooki wants to be tanned evenly, she wants to tan the exact same amount every day. Draw (approximately) the highest indifference curve that she can reach. Should Snooki save or borrow money on Wednesday? Show graphically how 1 ya u, Mg: t; 6 E "\ I? i E i1, 7— ?l’f) r w . M j I324 t/tiggi ft [25 points] a) [7] Mike’s friend Deena asks to borrow $100. Deena will pay Mike back in one year. How much should Mike ask Deena to pay him back in one year? Write out the general formula that you will use to solve this problem. Let the interest rate be 5%. What if the interest rate is 10%? in which scenario does Deena owe Mike more money next year? Why does this make sense? Explain. Wat-a”: - b) [8] Now Danny is considering some new business ideas. Ronnie proposes a project that will cost $500 and offer a onetime return of $700 next year. Vinny proposes a project that will cost $400 and offer a one time return of $600 next year. J-Woww proposes a project that will cost $300 and offer a one—time return of $500 next year. Finally, Mike proposes a project that will cost $200 and offer a one—time return of 5250 next year. What is the rate of return on each project? Derive the demand curve for investment funds at the Jersey Shore. (Hint: Since there are only four potential projects, this demand curve will be a step function.) Damage ' g 1, a?“ gm,w.,..w.w at. c) [5] Which projectls) will the entrepreneurs of part b) invest in if the current annual interest rate is 42%? Explain. d) [5] Suppose Sammy has a project that will pay $50 a year forever, starting next year. How much should Danny pay Sammy for the rights to this project? You can assume that the interest rate will remain at 42% forever. (You don’t need to work out the numerical answer, just set up the problem and show how to find it.) ...
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