| Line 1: |
Line 1: |
| | + | {{Economics Homework}} |
| | + | |
| | 1. A consumer's overall satisfaction is expressed in [[economics]] as his _________________. | | 1. A consumer's overall satisfaction is expressed in [[economics]] as his _________________. |
| | | | |
| Line 11: |
Line 13: |
| | 3. Suppose your favorite hobbies are reading books and hiking, and imagine that they have the following values for marginal utility. The first hour that you hike gives you lots of utility: 10 units. But as you start to tire, you enjoy and benefit from it less. The next hour of hiking is worth only 8 units of utility (in other words, it has a marginal utility of 8 units rather than 10), and the next hour of hiking is worth only 5 units, and then 3, then 1, and then zero for the next hours, in that order. Your marginal utility for reading books does not decline so quickly. In the first hour, reading a book gives you utility of 6 units; the next hour is worth 5 units; the next hour is worth 4 units; and then 3, 2, 1 and 0. Suppose that you have 5 extra hours today. How should you spend those hours on hiking and reading in order to maximize your utility, and what will be your total utility for those 5 hours? Explain your answer. | | 3. Suppose your favorite hobbies are reading books and hiking, and imagine that they have the following values for marginal utility. The first hour that you hike gives you lots of utility: 10 units. But as you start to tire, you enjoy and benefit from it less. The next hour of hiking is worth only 8 units of utility (in other words, it has a marginal utility of 8 units rather than 10), and the next hour of hiking is worth only 5 units, and then 3, then 1, and then zero for the next hours, in that order. Your marginal utility for reading books does not decline so quickly. In the first hour, reading a book gives you utility of 6 units; the next hour is worth 5 units; the next hour is worth 4 units; and then 3, 2, 1 and 0. Suppose that you have 5 extra hours today. How should you spend those hours on hiking and reading in order to maximize your utility, and what will be your total utility for those 5 hours? Explain your answer. |
| | | | |
| − | :You would spend 3 hours hiking and 2 hours reading, for a total utility of 10 (hiking) + 8 (hiking) + 6 (reading) + 5 (hiking) + 5 (hiking), which equals 34 units of utility. | + | :You would attain the maximum utility as follows: 10 (hiking) + 8 (hiking) + 6 (reading) + 5 (hiking) + 5 (reading), which equals 34 units of utility. |
| | | | |
| | :If you had spent your entire 5 hours hiking, then your total utility would be only 27 units. If you had spent your entire time reading, then your total utility would be only 21 units. Neither of these options attains maximum utility. | | :If you had spent your entire 5 hours hiking, then your total utility would be only 27 units. If you had spent your entire time reading, then your total utility would be only 21 units. Neither of these options attains maximum utility. |
| Line 22: |
Line 24: |
| | | | |
| | :The line's slope must be negative one because you must give up the exact same quantity of one good and receive the exact same quantity of the other good in order to maintain the same level of happiness. | | :The line's slope must be negative one because you must give up the exact same quantity of one good and receive the exact same quantity of the other good in order to maintain the same level of happiness. |
| | + | |
| | + | :If the line's slope were not negative one, then one of the goods would be preferred to the other rather than the goods' being perfect substitutes. |
| | | | |
| | 6. Describe either the "income effect" or the "substitution effect." Take your pick. | | 6. Describe either the "income effect" or the "substitution effect." Take your pick. |
| Line 51: |
Line 55: |
| | :A Giffen good is a good whose demand actually increases as its price increases. It's doubtful that Giffen good really exists because it is contrary to the Law of Demand. | | :A Giffen good is a good whose demand actually increases as its price increases. It's doubtful that Giffen good really exists because it is contrary to the Law of Demand. |
| | | | |
| − | :10. Prove the Law of Demand as simply as you can, perhaps using the assumption that the consumer always tries to maximize marginal utility.
| + | 10. Prove the Law of Demand as simply as you can, perhaps using the assumption that the consumer always tries to maximize marginal utility. |
| | | | |
| | :The Law of Demand is a combination of the income effect and the substitution effect, such that demand for a good always decreases when its price increases. | | :The Law of Demand is a combination of the income effect and the substitution effect, such that demand for a good always decreases when its price increases. |
| Line 64: |
Line 68: |
| | [[File:IndifferenceCurve2.gif|550px]] | | [[File:IndifferenceCurve2.gif|550px]] |
| | | | |
| − | :They are perfect complements. The curves show that "extra" one one good is useless (no utility) without "extra" of the other good to go along with it. Extra ketchup has no value without an extra hamburger to go along with it, for example. | + | :They are perfect complements. The curves show that "extra" of one good is useless (adds no utility) without "extra" of the other good to go along with it. Extra ketchup provides no added utility without an extra hamburger to go along with it, for example. But if the quantity of both goods increase along the dotted line, then utility does increase. |
| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |