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# QUESTIONS 1. Ricardo Johnson is having a difficult time deciding whether or not to purchase a new car.

QUESTIONS

1. Ricardo Johnson is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help him make a decision?

2. XYZ Steel has an inventory of steel that it originally purchased for \$20,000. It currently has an offer to sell the steel for \$30,000. Should XYZ Steel’s management agree to sell? Explain.

3. Janet Chang has to choose between buying more school supplies or more cosmetic products for the week. She has a fixed income and she knows the prices of both products. Using indifference curves and budget constraint lines, illustrate the amount of school supplies and cosmetic products that Janet will purchase.When she gets to the store, she finds the price of cosmetic products has fallen dramatically. How does this change her optimal purchase?

4. Draw supply and demand curves. Show the impact of an increase in demand. What happens to the price and quantity exchanged in the market? Show the impact of a decrease in demand. What happens to the price and quantity exchanged in the market?

5. Igor’s preferences for coffee (by the pound) and doughnuts (by the dozen), can be characterized as follows:

• Marginal Utility Coffee = MUx = y2
• Marginal Utility Doughnuts = MUy = 2xy

If the ratio of relative prices is (Px/Py) = 6/3 = 2, and Igor’s income is \$90 per period, what combination of pounds of coffee and dozens of doughnuts will he choose?

Now let the ratio of coffee to doughnut prices decline to unity (=1), holding the price of doughnuts constant. How does Igor respond to the reduction in the relative price of coffee?

6. If Boeing’s aircraft prices in dollars increase 20% and the yen/dollar exchange rate declines 15%, what effective price increase is facing Japan Airlines for the purchase of a Boeing 747? Would Boeing’s margin likely rise or fall if the yen then depreciated and competitor prices were unchanged? Why?

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