Chapter 10 Review AP Micro 10/2

Homework Check Get out a different colored pen and correct your answers Remember I grade on completeness (not correctness). This means it is in YOUR best interest to correct your own work and learn from your mistakes!!! If you have unanswered questions—TODAY IS THE DAY TO ASK! Use this homework to study for the quiz tomorrow!

1. Below is the marginal utility for a particular product. # of utils for 1st unit: 300 # of utils for 2nd unit: 250 # of utils for 3rd unit: 220 # of utils for 4th unit: 160 # of utils for 5th unit: 100 # of utils for 6th unit: 50 # of utils for 7th unit: 20 # of utils for 8th unit: # of utils for 9th unit: -250 1. Below is the marginal utility for a particular product. Plot the total utility curve. b. Plot the marginal utility curve directly under the total utility curve on a separate graph. c. At what marginal utility value does total utility reach a maximum?

2. a. Stan has $50. Granola bars are $2 each, and comic books are $20 2. a. Stan has $50. Granola bars are $2 each, and comic books are $20. He is considering a consumption bundle containing 10 granola bars and 2 comic books. Not within possibilities (spends $60) b. He now has $85. Granola bars are $2 each, and comic books are $25. He is considering a consumption bundle containing 5 granola bars and 3 comic books. Within possibilities, and on budget line (spends $85 exactly) c. He now has $100. Granola bars are $3 each, and comic books are $25. He is considering a consumption bundle containing 10 granola bars and 3 comic books. Not a possibility (spends $105)

List her possible consumption bundles. 1g, 5s 2g, 4s 3g, 3s 4g, 2s 3. The following data shows Caroline’s total utility from the consumption of two goods: basketball games and theatre shows. Caroline has $600, games cost $100, and shows cost $100. List her possible consumption bundles. 1g, 5s 2g, 4s 3g, 3s 4g, 2s 5g, 1s b. Calculate the marginal utility and marginal utility per dollar spent for both products. You’ll have to add two columns to the table per product. c. Which combination of games and shows will Caroline consume? Why? 3 games and 3 shows = MU/P for each = 7 # of games TU # of shows 1 1000 2 1800 3 2500 4 3000 5 3200

d. Now suppose the price of theatre shows doubles d. Now suppose the price of theatre shows doubles. What will happen to Caroline’s consumption of the two goods? Prove using a total utility test. 2g, 2s: TU = 1800+1800 = 3600 4g, 1s: TU = 3000+1000 = 4000  optimal bundle e. What is the connection between the substitution effect and the change in Caroline’s consumption? Price of shows increased  MU per dollar (MU/P) fell. To maximize utility, Caroline buys more games (the substitute) because her MU per dollar is greater for games than shows

4. To increase marginal utility, you must decrease consumption (everything else held constant). This statement is correct, even though it sounds strange. Explain why. Diminishing marginal utility. Example: First cupcake = 50 utils Add the 2nd = add 30 more utils Add the 3rd = add 5 more utils So instead of eating the 3rd, decrease consumption to only 2. Marginal utility is greater at 2.

5. Paul spends all of his money on cheese and wine 5. Paul spends all of his money on cheese and wine. A bottle of wine costs $30, and a pound of cheese costs $15. At his current consumption level, the marginal utility of a bottle of wine is 20 utils, and the marginal utility of a pound of cheese is 45 utils. In order to maximize his utility, what should Paul do? Explain. MU/P for cheese must equal MU/P for wine MU/P for cheese: 45/15 = 3 MU/P for wine: 20/30 = .67 Paul should buy more cheese and less wine. This will decrease MU/P for cheese and increase MU/P for wine until they are equal.

6. Damien has 14 hours of free time today 6. Damien has 14 hours of free time today. He wants to watch movies and spend time at the gym. Each movie lasts 2 hours, and each gym visits lasts 2 hours. # of movies TU from movies # of gym visits TU from gym visits 1 100 60 2 180 110 3 240 150 4 280 5 310 190 6 330 195 7 340 197 Quantity of movies Utility from movies 1 100 2 180 3 240 4 280 5 310 6 330 7 340 Quantity of gyrm Utility fromgym 1 60 2 110 3 150 4 180 5 190 6 195 7 197 0 gym visits, 7 movies 1 gym visit, 6 movies 2 gym visits, 5 movies 3 gym visits, 4 movies 4 gym visits, 3 movies 5 gym visits, 2 movies 6 gym visits, 1 movie 7 gym visits, 0 movies

Movies Gym Quantity of gym visits TU MU MU/hr 1 100 50 2 180 80 40 3 240 60 30 4 280 20 5 310 15 6 330 10 7 340 Quantity of movies TU MU MU/hr 1 60 30 2 110 50 25 3 150 40 20 4 180 15 5 190 10 6 195 2.5 7 197

Optimal consumption bundle: 3 gym visits and 4 movies MU/hr for gym = 20 MU/hr for movies = 20

MU/Pham = MU/Peggs 50/$10 = 60/X X = $12 7. Sarah is currently consuming the utility-maximizing amount of green eggs and ham. The last slab of ham she purchased gave her a marginal utility of 50 utils, and ham costs $10 a slab. The marginal utility of the last green egg she purchased gave her a marginal utility of 60 utils. How much do green eggs cost? Sarah is maximizing utility. MU of last slab of ham = 50 Price of ham = $10 MU of last green egg = 60 Price of green eggs = ? MU/Pham = MU/Peggs 50/$10 = 60/X X = $12