Answers to Review Questions 1. To say that someone needs a good is to suggest that he cannot choose to do without the good or buy a substitute for it. We are more likely to be mindful of the fact that almost all goods have substitutes if we speak of wants rather than needs 2. Even though we cannot actually measure utility directly, the marginal utility model helps us gain a better understand ing of how a rational consumer would allocate her income among different goods 3. The law of diminishing marginal utility says that the first units we consume of a good deliver the highest " bang for the buck, and this means that we can general achieve higher util ity by spread ing our incomes over many goods than by concentrating them on only a few 4. A scarce good must be rationed in one way or another. If its monetary price is zero, people will either have to wait in line for it, as in the free ice cream example, or pay a bribe, or incur some other cost to gain access to it 5. Many people report that they didn't like spicy food the first time they ate it, or didnt like a certain comedian the first time they heard him. But on repeated exposure, they often find that they like these experiences more and more Answers to problems 1. Because willingness to pay for food quality is likely to be an increasing function of income, we expect patrons of the gourmet restaurant to have higher incomes,oI average, than the patron of the diner. And since will ingness to pay for service is also likely to be an increasing function of income, we expect higher serv ice qual ity in the gourmet restaurant. Since diners tend to leave tips of about 15 percent of the prices of their meals, gourmet restaurant patrons do, in fact, pay for, and receive, higher service quality 2. Since the marginal cost of an add it ional morsel of food is zero, a rational person will continue eating until the marginal benefit of the last morsel(its marg inal utility) falls to zero 3. Martha is currently receiving(75 utils/ounce)/(0. 25/ounce)=300 utils per dollar from her last dollar spent on orange juice, but only (50 utils/ounce)/($0.20 /ounce) 250 utils per dollar from her last dollar spent on coffee. Since the two are not equal, she is not max imizing her utility. She should spend more on orange juice and less on corree 4. Toby is currently receiving(100 utils/ounce)/(0. 10/ounce)=1000 utils per dollar
Answers to Review Questions 1. To say that someone needs a good is to suggest that he cannot choose to do without the good or buy a substitute for it. We are more likely to be mindful of the fact that almost all goods have substitutes if we speak of wants rather than needs. 2. Even though we cannot actually measure utility directly, the marginal utility model helps us gain a better understanding of how a rational consumer would allocate her income among different goods. 3. The law of diminishing marginal utility says that the first units we consume of a good deliver the highest “bang for the buck,” and this means that we can generally achieve higher utility by spreading our incomes over many goods than by concentrating them on only a few. 4. A scarce good must be rationed in one way or another. If its monetary price is zero, people will either have to wait in line for it, as in the free ice cream example, or pay a bribe, or incur some other cost to gain access to it. 5. Many people report that they didn’t like spicy food the first time they ate it, or didn’t like a certain comedian the first time they heard him. But on repeated exposure, they often find that they like these experiences more and more. Answers to Problems 1. Because willingness to pay for food quality is likely to be an increasing function of income, we expect patrons of the gourmet restaurant to have higher incomes, on average, than the patron of the diner. And since willingness to pay for service is also likely to be an increasing function of income, we expect higher service quality in the gourmet restaurant. Since diners tend to leave tips of about 15 percent of the prices of their meals, gourmet restaurant patrons do, in fact, pay for, and receive, higher service quality. 2. Since the marginal cost of an additional morsel of food is zero, a rational person will continue eating until the marginal benefit of the last morsel (its marginal utility) falls to zero. 3. Martha is currently receiving (75 utils/ounce)/($0.25/ounce) = 300 utils per dollar from her last dollar spent on orange juice, but only (50 utils/ounce)/($0.20 /ounce) = 250 utils per dollar from her last dollar spent on coffee. Since the two are not equal, she is not maximizing her utility. She should spend more on orange juice and less on coffee. 4. Toby is currently receiving (100 utils/ounce)/($0.10/ounce) = 1000 utils per dollar
from his last dollar spent on peanuts, and(400 utils/ounce)/($0.25 /ounce)=1600 utils per dollar from his last dollar spent on cashews. Since the two are not equal, he is not maximizing her utility. He should spend more on cashews and less or peanuts 5. The information given enables us to conclude that Ann's average util ity per dollar is the same for both pizza and yogurt. But this information does not enable us to say whether her current combination of the two goods is optimal. To do that, we must be able to compare their respective values of marginal utility per dollar. 6a. Even at twice the original price, the marg inal utility per dollar of the 20th train trip ay be higher than the correspond ing ratio for any other good that Ann might consume, in which case she would be perfectly rational not to alter the number of trips she takes. After all, missing a trip would be to miss a whole day's work b. The higher price of train tickets makes Ann poorer. The income effect of the price increase is what lead s to the reduction in the number of restaurant meals she eats 7. Consumer surplus is the area of the shaded triangle =(1n2)bh =(1/2)(80,000 galyr)x($8/gal=$320, 000/yr Price (S/gallon) Consumer surplus =$320,000/yr 8 and 9. The affordable combinations and their correspond ing utilities are as listed in the table, which shows that the optimal combination is 3 pizzas per week and 2 movie
from his last dollar spent on peanuts, and (400 utils/ounce)/($0.25 /ounce) = 1600 utils per dollar from his last dollar spent on cashews. Since the two are not equal, he is not maximizing her utility. He should spend more on cashews and less on peanuts. 5. The information given enables us to conclude that Ann’s average utility per dollar is the same for both pizza and yogurt. But this information does not enable us to say whether her current combination of the two goods is optimal. To do that, we must be able to compare their respective values of marginal utility per dollar. 6a. Even at twice the original price, the marginal utility per dollar of the 20th train trip may be higher than the corresponding ratio for any other good that Ann might consume, in which case she would be perfectly rational not to alter the number of trips she takes. After all, missing a trip would be to miss a whole day’s work. b. The higher price of train tickets makes Ann poorer. The income effect of the price increase is what leads to the reduction in the number of restaurant meals she eats. 7. Consumer surplus is the area of the shaded triangle = (1/2)bh = (1/2)x(80,000 gal/yr)x($8/gal)= $320,000/yr. 10 100 Price ($/gallon) 1000s of gallons/yr 80 2 Consumer surplus = $320,000/yr. 8 and 9. The affordable combinations and their corresponding utilities are as listed in the table, which shows that the optimal combination is 3 pizzas per week and 2 movie
rentals Combinations of pizza and rentals that cost $24 per week Total Utilit 20+57=77 38+54=92 3 pizzas, 2 rentals 4 pizzas, O rentals 68+0=68 10a. The market demand curve(right panel) is the horizontal summation of the two individual demand curves (left and center panels) b. Total consumer surplus is the sum of the three shaded areas area of small triangle =(1/2)bh=(1/2)x(16 tickets/yr)x($12/ticket)=$96/yr; area of rectangle bh=(16 tickets/yr)($12/ticket)=$192/yr; area of large triangle =(1/2)bh=(64 tickets/yr)x($12/ticket)=$768/yr Total consumer surplus=$96/yr $192/yr $768/yr=$1056/yr Price Price Price (S/ticket) (/ticket) (S/ticket) 24 12 tickets/yr tickets/yr 1648 6
rentals. Combinations of pizza and rentals that cost $24 per week Total Utility 0 pizzas, 8 rentals 0 + 57 = 57 1 pizza, 6 rentals 20 + 57 = 77 2 pizzas, 4 rentals 38 + 54 = 92 3 pizzas, 2 rentals 54 + 46 = 100 4 pizzas, 0 rentals 68 + 0 = 68 10a. The market demand curve (right panel) is the horizontal summation of the two individual demand curves (left and center panels). b. Total consumer surplus is the sum of the three shaded areas: area of small triangle = (1/2)bh = (1/2)x(16 tickets/yr)x($12/ticket) = $96/yr; area of rectangle = bh = (16 tickets/yr)x($12/ticket) = $192/yr; area of large triangle = (1/2)bh = (64 tickets/yr)x($12/ticket) = $768/yr; Total consumer surplus = $96/yr + $192/yr + $768/yr = $1056/yr. 24 96 tickets/yr Price ($/ticket) 48 36 Price ($/ticket) tickets/yr 144 tickets/yr Price ($/ticket) 36 24 24 12 12 16 16 12 80
