AEC 251 problem set 1_fall 2018 (1)

Marginal analysis compares the additional benefits of

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Marginal analysis compares the additional benefits of a given situation to the additional costs, so as the price of a good increases, more people will be driven to buy that given good, thus, making the producer more money. 16. For each of the following situations, decide whether the bundle Sarah is considering optimal or not. If it is not optimal, how could Sarah improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on. a) Sarah has $15 to spend on Chocolates and Coffee. Chocolates cost $5 per pound, and a cup of coffee costs $3. She is thinking about buying 3 pounds of Chocolates and 5 cups of coffee. She tells her friend that the additional utility she would get from the third pound of chocolates is the same as the additional utility she would get from the fifth cup of coffee. This situation is optimal for sarah, as she would be getting the same amount of total utility from both the coffee and the chocolate. b) Sarah has $90 to spend on fish and chicken. A pound of fish costs $8 and a pound of chicken costs $2. She is thinking about buying 5 pounds of fish and 25 pounds of chicken. Also, the last pound of fish would add four times as much to her total utility as the last pound of chicken. This situation is not optimal for sarah, since she is only adding the fish to her total utility. She needs to buy more chicken and less fish in order to balance her total utility. Chapter 4: Demand, Supply and Equilibrium 4
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AEC 251 Fall 2018 – Problem Set #1 17. Using separate diagrams for each of the following events, show the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the events. a) A FDA report reveals that consumption of mint leads to a decrease in body fat. What happens to the mint market? b) A survey indicates that chocolate is American’s favourite ice cream flavour. What is the effect on the chocolate ice cream market if a new innovation in production practices cuts the cost of vanilla extract flavouring by 80% and hence lowers the price of vanilla ice-cream? c) USA and Canada are major exporters of smoked salmon. Suppose, workers in Canada go on a strike. Show graphically the effect on the Canadian smoked salmon market? What is the effect on the smoked salmon market in the USA? 5
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AEC 251 Fall 2018 – Problem Set #1 18. Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events. a) There is a hike in the wages of agricultural labourers. And at the same time, due to a change in the tax code, the incomes of farm operations that hire ag labor declines. b) The price of coffee increases. At the same time, robots for mechanical pruning and harvesting are developed which lower the cost of production of tea.
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