2009 B Microeconomics FRQ #2

2009 B Microeconomics FRQ #2

Watch me answer it here

https://youtu.be/Bv5i6-9NvRg

(A) Assume the last unit of peanuts consumed increased Sasha's total utility from 40 utils to 48 utils and that the last unit of bananas consumed increase her total utility from 52 to 56 utils.

(i) If the price of a unit of peanuts is $1 and Sasha is maximizing utility, calculate the price of a unit of bananas.

Anytime, you see a utility question use the formula:

(ii) If the price of a unit of peanuts increases and the price of a unit of bananas remains unchanged from the price you determined in (a)(i), how will Sasha's purchase of peanuts change?

Understand that if the price of peanuts increases, then the value of MU (marginal utility) to price will decrease. If the price of peanuts increase then for every dollar spent on peanuts I will be able to buy fewer and fewer peanuts.

(B) Assume that the cross price elasticity (XED) of demand between peanuts and bananas is positive. A widespread disease has destroyed the banana crop. What will happen to the equilibrium price and quantity of peanuts in the short-run? Explain.

Understand what a positive XED means, from the elasticity cheat sheet here.

Since peanuts and bananas are substitutes, when the crop of bananas are destroyed (banana's supply curve shifts leftward) the price of bananas will rise and consumers will demand more peanuts as they are a substitute for bananas they (peanuts) are relatively cheaper. You must understand that if the price of bananas rises and the price of peanuts stays the same, then, per dollar spent, peanuts have now become cheaper. 

(C) Assume the price of bananas increase.

(i) Will the substitution effect increase, decrease, or have no effect on the quantity of bananas demanded?

The substitution effect will decrease the quantity of bananas demanded. Price goes up the quantity demanded goes down. The substitution effect is one of the very reasons that the demand curve slopes down....

(ii) What happens to Sasha's real income?

 If prices rise/Inflation increases then real incomes/wages fall.

From an earlier post on nominal and real wages here.

2012 Microeconomics Exam FRQ # 2

2012 Microeconomics Exam FRQ # 2

Watch me answer it on Youtube https://youtu.be/pu9aX-eOWYg

(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/PB = 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.

If the Price of Toy Cars is given then we need the Qd of another good and in this situation the Qd we need is for blocks. 

Xed is the comparison between 2 different goods

Toy Cars & Blocks

 Formula - 

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

Answer - One point is earned for calculating the cross-price elasticity for toy cars and blocks:

-0.04/0.10 = -0.4