Gbu Practice

Chapter8

Jerry has $12 a week to spend on yogurt and magazines. The price of yogurt is $2, and the price of a magazine is $4.

1. List the combinations of yogurt and magazines that Jerry can afford. Draw a graph of Jerry’s budget line with the quantity of magazines plotted on the x-axis.

Jerry can buy 6 yogurts and 0 magazines; 4 yogurts and 1 magazine; 2 yogurts and 2 magazines; and, 0 yogurts and 3 magazines. Figure 8.1 shows Jerry’s budget line.

2. Describe how Jerry’s consumption possibilities change if, other things remaining the same, (i) the price of a magazine falls and (ii) Jerry’s income increases.

(i) If the price of a magazine falls, Jerry’s consumption possibilities increase. His budget line rotates outward around the unchanged vertical intercept, which shows the (unchanged) maximum quantity of yogurt Jerry can buy.

(ii) If Jerry’s income increases, Jerry’s consumption possibilities increase. His budget line shifts outward and its slope does not change.

Use the following data to work Problems 3 to 9.

Hours per day | Total utility from windsurfing | Total utility from snorkeling |

1 | 120 | 40 |

2 | 220 | 76 |

3 | 300 | 106 |

4 | 360 | 128 |

5 | 396 | 140 |

6 | 412 | 150 |

7 | 422 | 158 |

Max enjoys windsurfing and snorkeling. Max has $35 a day to spend, and he can spend as much time as he likes on his leisure pursuits. The price of renting equipment for windsurfing is $10 an hour and for snorkeling is $5 an hour. The table shows the total utility Max gets from each activity.

3. Calculate Max’s marginal utility from windsurfing at each number of hours per day. Does Max’s marginal utility from windsurfing obey the principle of diminishing marginal utility?

Max’s marginal utility from windsurfing 1 hour per day is 120; from windsurfing 2 hours per day is 100; from windsurfing 3 hours per day is 80; from windsurfing 4 hours per day is 60; from windsurfing 5...