San Francisco State University ECON 101

Matthew Keen Fall 2016

Homework 3

Please make sure all graphs are clearly labeled. Each of these questions should be answered with complete sentences. Due at the start of class Sept 27th; no late homework is accepted.

All questions are taken from the text book, Principles of Microeconomics, chapter 6.

1. Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \$2 in gasoline money. He has a total of \$10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values given in Table 6.11, figure out the points on Jeremy’s consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility- maximizing point.

4. As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?

9. Who determines how much utility an individual will receive from consuming a good?

10. Would you expect total utility to rise or fall with additional consumption of a good? Why?

11. Would you expect marginal utility to rise or fall with additional consumption of a good? Why?

16. Why does a change in income cause a parallel shift in the budget constraint?

23. Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?

31. If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?