## Wednesday, April 15, 2015

### 2012 Microeconomics Exam FRQ # 2

2012 Microeconomics Exam FRQ # 2

(a) The table above shows Theresa's marginal utility from bagels and toy cars.
(i) What is here total utility from purchasing three toy cars?

So simple it's easy to get wrong... overthinking again?

3 toy cars (10+8+6) = 24 utils

Answer - One point is earned for determining the total utility, which is 24.

(ii) Theresa's weekly income is \$11, the price of a bagel is \$2 dollars, and the price of a toy car is \$1.
What quantity of bagels and toy cars will maximise Theresa's utility if she spends her entire weekly income on bagels and toy cars?
Explain using marginal analysis.

First, you must know the formula..

Then make a chart------

If you get to a place where both purchases have the same utility then you will be indifferent,, either one will do as long as you have cash to spend.
or
Using Marginal Analysis
MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3
the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.

Answer - One point is earned for stating that three bagels and five toy cars will be purchased.

Answer - One point is earned for explaining that with this combination of bagels and toys, the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.
Using Marginal Analysis
MU/P= 6/2 = 3 and MU/PTC = 3/1 = 3

(b) Assume that the price of wheat, an input for the price of bagels, increases. Will Theresa's demand for bagels increase, decrease, or remain unchanged. Explain.

Remember, that input prices affect suppliers of a good,, not demanders.. So, Theresa will not change her demand for bagels if the price of wheat increases.

Answer - One point is earned for stating that Theresa’s demand for bagels will not change because the increase in the price of wheat will affect the supply of bagels, not the demand.

(c) Suppose that Theresa's income elasticity for bagels is -0.2. Does the value of Theresa's income elasticity indicate that bagels are a normal good, inferior good, substitute, or compliments?

Answer - One point is earned for stating that bagels are inferior goods.

(d) Suppose the price of toy cars increase by 10%. Theresa buys 5% fewer toy cars and 4% less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks, and indicate if it is positive or negative.
 You gotta be *&(6%^# kidding me.

Formula -

% change in   Qd = -.04   (4% less)
% change in Price = .10

Answer - One point is earned for calculating the cross-price elasticity for toy cars and blocks:
-0.04/0.10 = -0.4