1. (50 pts.) Suppose the demand function for the Toyota Camry is given by
Qd = 500 -12PC + 10PH - 5PG + 0.0001M, where PC is the price of the Toyota Camry (in
thousands), PH is the price of the Honda Accord (in thousands), PG is the price of gas (per
gallon) and M is income. Further, suppose the supply curve for the Toyota Camry is given
by Qs = 20PC - 55.
a. What is the demand curve for the Toyota Camry if the price of the Accord is $25,000,
gas is $2 per gallon and income is $50,000?
b. What is the equilibrium price and quantity in the market for Toyota Camrys?
c. Is demand elastic or inelastic at the equilibrium price?
d. What is the cross price elasticity of demand at equilibrium?
e. What is the income elasticity of demand for Camrys at equilibrium?
2. (10pts.) Suppose that you can schedule a worker up to four hours per day. The benefit
function is given by B(H) = 500H - 22.5H2 and the cost function is given by C(H) = 100 +
15H2. The corresponding marginal benefit and marginal cost functions are given by MB(H) =
500 - 45H and MC(H) = 100 + 30H. What is the best choice of hours for this worker?
3. (30 pts.) Harriet enjoys watching both American Idol and Desperate Housewives on
television. Her preferences correspond to the utility function U(A,D) = 2A + 4√D, where A
stands for the number of hours she watches American Idol and D is the number of hours she
watches Desperate Housewives.
a. How would Harriet rank the following alternatives: 4 hours of American Idol and 2 hours
of Desperate Housewives, 2 hours of American Idol and 4 hours of Desperate Housewives
and 3 hours of American Idol and 3 hours of Desperate Housewives?
b. Suppose that one week, Desperate Housewives is not shown, but there is a two-hour
American Idol special (instead of the usual one-hour program). Is Harriet better off or worse
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c. Would Harriet's preferences change if her utility function was expressed as U(A,D) = 2A +
4√D+6? Why or why not?
5. (10 pts.) Nicole's income is $1,000 per month. She spends all of it on shoes (S) and books
(B). Shoes cost $50 and books cost $25. Her marginal rate of substitution for shoes with
books is MRSSB = 2B/3S. Illustrate her utility-maximizing combination of shoes and books
and draw her price-consumption curve if the price of books rises to $30.
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