Lecture 4 Quiz

Model Answers Submitted By Students

  1. The total utility of a good represents the consumer’s _________________.

The total utility of a good represents the consumer’s overall satisfaction. (Zak S.)

  1. Bad British economic policies and a fungus wiped out the basic food supply of potatoes in Ireland between 1846 and 1849, killing 500,000 and sending many Irish to the United States. Do you think potatoes might have been an inferior good then? What would you expect the income effect of the shortage of potatoes to have been?

During the potato blight the Irish potato was an inferior good. When the price of the potato was low demand was not as high as when the price of the potato was high. Since the potato was still cheaper than other, better food, the Irish were forced to buy more potatoes to substitute for the meat and other nice food that they could buy when the potato was cheaper. If the price of the potato went down the demand for it would have also gone down because the Irish could have bought meat and other food to substitute the potato in their diet. (Kris T.)

[P]otatoes were an inferior good then. I would expect the shortage to drive up the price of potatoes making people’s income seem lower. (Tim S.)

The potatoes were an inferior good. They were inferior because the people bought more potatoes when their incomes were decreasing. Because there were more bought, and not less, they were “inferior”. The income effect would be that as the price of goods increases, then the income of the buyer would go down. (Patricia H.)

  1. Scott wants to maximize his lifetime income, and has to choose between working or studying. His job pays $6 per hour. Under what condition should Scott stop working at his job and start studying?

I should stop working when I have enough money saved up to support myself while I study. (Scott J.)

Because of the opportunity cost Scott should quit his job and start studying. Since he is not making a substantial amount of money, he should be studying in order that he can receive a better education and a better job. For opportunity cost to work the revenue from his job later in life would have to be more than the money he would make if he worked when he was younger and the job he would get later in life with less of an education. (Chris B.)

The conditions that Scott should stop working and start studying would be the possibility … of him needing to take some classes which cost money in order for him to possibly get a better paying job. (Anthony B.)

If Scott is young and has extra time, he should probably study more so that he can improve his skills and eventually earn more money. But if he is older (say 70 something) and can just barely afford to live where he is now, then he can’t study, he must work just to survive. (Abby L.)

He should stop working and start studying when the opportunity cost of not studying exceeds the money he’s making from working. (Joshua H.)

  1. Alyssa likes swimming and playing the violin. The first hour she swims she improves by 6 units of utility, and then each successive hour she improves by half the rate of the hour before it. The first hour she practices the violin she improves by 4 units of utility, then each successive hour she improves at a rate of 90% the hour before it. In 3 total hours to practice, how should she maximize her utility?

She should maximize her utility by swimming for one hour and playing the violin for two hours. (Sarah S.)

[T]o maximize her utility in these three hours, Alyssa should swim for one hour and then practice violin for two hours. This would result in a total of 13.6 units of utility for those three hours. (Daniel L.)

To maximize my utility I should swim for an hour, and then practice for two, bringing my total utility to 13.6. (Actually Mr. Schlafly, I play for one hour and swim for two, but that is really besides the point. After all it is your homework assignment!) (Alyssa G.)

  1. Cara earns $300 a week after taxes, of which she spends $100 on transportation and other work-related expenses, $100 on 5 units of fun and $100 in savings. The price of fun is $20, but then it increases to $40. What type of effect determines how much fun Cara will buy? Cara then gets a raise to $400 a week. What type of effect determines how much fun she buys now? Explain.

The substitution effect and the income effect determine the amount of fun she buys because her real income decreases with an increase in price (income effect) and she will want to spend her money on something else (substitution effect). (Ben S.)

Substitution effect determines how much fun Cara will buy when the price is raised. When her income is raised, income effect best determines the amount of fun she buys. (Lisa H.)

The effect that determines how much fun she will buy right after the price increases is the substitution effect, because the increased price of fun will motivate her to spend the money on something else. After she gets the raise, the income effect will determine how much fun she buys because the increase in her total income motivate her to spend more on everything that will increase her total utility, and it’s a safe bet that fun will accomplish that purpose at least as well as anything else. (Chris J.)

  1. Suppose you manage a golf course for profit. You poll your customers and find that, each month, they value their first game at $30, their second game at $20, their third at $10, fourth at $0, and refuse to play any more in the same month. It is impractical to charge based on whether someone has previously played a round this month. How do you best charge your customers?

Since most golf courses I know you have to be a member in order to play I would charge $60 a month for membership. $30 + $20 + $10 + $0 = $60. Or I might charge a little more, say $70, and throw in free access to food and beverages. (Sarah C.)

A monthly membership to the course at sixty dollars per month would do nicely. If a person only plays one game that month, I will have doubled my profits over the customers’ utility value of the first game. (Greg J.)

I would charge the customers a monthly fee of $60 per month and let them play as much as they want. They only want to play four games and pay a total of $60 for those four games ($30+$20+$10+$0), so I get the maximum they are willing to pay me and they get their four games at the price they value them at. It comes out exactly the same as if I charged them per game based on whether they had already played. (Joseph S.)

  1. Suppose Greg, Jessica, Charles and Abby are at a party where there is a shortage of cake and scoops of ice cream. There are only 4 pieces of cake and 4 scoops of ice cream left. Greg says he likes cake twice as much as ice cream; Jessica says the opposite. Charles prefers cake and ice cream in equal servings. Abby likes only ice cream. What servings maximize total utility?

There are a few ways you could do this. You can give Greg either 4/3 pieces of cake and 2/3 scoops of ice cream, Jess 2/3 pieces of cake and 4/3 scoops of ice cream, Charles 1 scoop of ice cream and 1 piece of cake, and Abby 1 scoop of ice-cream. Now you have 1 piece of cake left over. You can also just give Greg 2 pieces of cake and Jess 2 scoops of ice cream. (Chris R.)

Greg: 2 pieces of cake. Charles: 1 piece of cake and 1 scoop of ice cream. Abby: 1 scoop of ice cream. Jessica: 2 scoops of ice cream and 1 piece of cake. (Alexandra S.)

Here are the rations: Greg will get two pieces of cake; Jessica will get two scoops of ice cream; Charles will get one scoop of ice cream and one piece of cake; and Abby will get one scoop of ice cream. It was worth it because everyone is happy, and there is an extra piece of cake that they can share. (Phyllis S.)

  1. Suppose a friend of yours announced that when he has a choice between a cheaper good made in China and a more expensive good made here, he will buy the latter based on his opposition to communism. Is he being irrational?

No, he is not being irrational. He is maximizing his own personal utility without thinking about how he can best save his money. He is one of those people who believe that money isn’t everything. I believe it is better to spend all your money on more expensive things if that means not compromising a conviction or not supporting someone with beliefs and actions that go against your conscience. (Rebecca B.)

No, he’s not being irrational. It gives him greater utility to buy from America. It is against his principles to buy from China in this case, so doing so would give him low or negative utility. (Mary Rose B.)

From a microeconomical point of view he is being very irrational. From a macroeconomical point of view, however, he made the most rational choice possible. (Michael N.)

If the goods are the same quality, and my friend is only letting his political preferences drive his choice, then he is being irrational because it is unlikely that his boycott would affect foreign politics (i.e., help eliminate communism). However, if he gets satisfaction (utility) by not buying goods produced in China and spending more for a USA-made product, then he is being rational. (Kirstin L.)

  1. Do you think a Giffen good really exists? Can you see any possible political bias in the claim that Giffen goods exist? Your views, please.

I believe that the existence of a Giffen good is doubtful. Liberals have a political motivation to claim that a Giffen good exists. If there truly was a situation where it was so easy for retailers to exploit the poor as the situation posed by a Giffen good, then that would present a powerful argument in favor of government price controls, to protect the consumer. Once the government instituted price controls on certain items, that would set a precedent. The government’s proverbial foot would then be in the door. The government could then establish price controls on any goods that it wished under the pretense of protecting the poor. In essence, the existence of a Giffen good would support liberals’ cries for more government control of the economy. My belief that this is the political motivation behind the claims that a Giffen good exists is to some extent corroborated by the fact that Sir Robert Giffen himself was a British bureaucrat, who was no doubt anxious to guard his freedom. (Eric J.)

I detect a subtle bias in the claim that Giffen goods exist. Although it is true that at times, in very rare circumstances, a Giffen good may exist, they are not very common, and if people blow their existence out of proportion, that’s when the bias creeps in. The reason why is because if Giffen goods were widespread and common, then price controls would begin to look like a good idea. If the government could just keep those prices from rising, then those poor, starving, hard-working families won’t run out of meat money and die from malnutrition because all they had money left for the expensive bread. So the bias is in favor of government regulation, and it works against a free economy. (Sarah B.)

  1. Let’s reconsider our fundraising dinner to promote homeschooling. Earlier we sought to maximize the profit (revenue minus expenses) from the dinner. But maximizing utility is not the same as maximizing profits. What non-profit motives might we have for a homeschool dinner? What might we do to maximize overall utility of the dinner?

Some non-profit motives would be as follows: Promoting the reputation of homeschoolers in general. Gain contacts. Make this a learning experience for the students involved. … (Charles A.)

The non-profit motives we might have for a homeschool dinner are to have fellowship with one another and share ideas with each other. It also might be to meet new people or to invite friends who are thinking of homeshcooling so they can talk to others with experience. … (Matt P.)

… Non-profit motives could be gaining work experience. We would have to work together, negotiate to get low prices, and learn how to work with a budget. (Jessica H.)

We could tell the people where their money is going so people who support homeschooling can come. (Cara M.)

  1. Last Friday I attended a fundraising dinner for a health care project for the poor. At the dinner, I learned of a new clinic in Red Bank that gives away completely free medical services. It seeks government funds to pay any malpractice claims by patients. Economically, what problems might arise for a completely free medical clinic? Do you think it will be there 20 years from now?

A completely free medical clinic poses several economic difficulties. First of all, if the clinic provides equal or superior care compared to other for profit or otherwise non-free medical clinics, then it would be overrun with patients, and when the clinic’s benefactors realize the amazing cost in both time and money, they may reconsider their commitment to the cause. If however, the clinic provides slightly inferior services, then, by definition, it will become an inferior good, and people will try to avoid the clinic if they can possibly afford to. If the clinic provides somewhat inferior services, then there is also the tremendous cost of lawsuits to be dealt with. … (Eric J.)

Price goes down, demand goes up: this is a very basic law of economics. So basically the clinic will be swamped. With so low a price people will be turning up for the least little thing. I don’t think this place will last because they’ll all go crazy trying to treat so many people. (Brandon M.)

… [T]he supply of workers would decrease and the demand for services would increase as time passed, and eventually it would have to close. (Kevin H.)

  1. Suppose you are a rational consumer who makes purchases by maximizing marginal utility. One day you hear that the price on a good you purchase (e.g., milk), falls by 30%. The Law of Demand says you should buy more of it. Using only the assumption that you maximize marginal utility, prove the Law of Demand as best you can.

Proof of the law of demand (If the price of ___ decreases then the demand for ____ increases) is found through the law of equiproportion marginal benefit (MUa/Pa=MUb/Pb=MUc/Pc). When the price of good ___ decreases (Pa decreases) the Marginal Utility of good ___ (MUa) must also decrease to keep MUa/Pa equal to MUb/Pb and MUc/Pc. To decrease the marginal utility of good ___ you (and all other rational consumers) buy more of it, and this increases the demand for good ___. Therefore if the price of good ___ decreases the demand for good ___ increases. (Tim S.)