The rows of the table in the problem do not represent the actual choices available on the budget set; that is, the combinations of round trips and phone minutes that Jeremy can afford with his budget. One of the choices listed in the problem, the six round trips, is not even available on the budget set. If Jeremy has only $10 to spend and a round trip costs $2 and phone calls cost $0.05 per minute, he could spend his entire budget on five round trips but no phone calls or 200 minutes of phone calls, but no round trips or any combination of the two in between. It is easy to see all of his budget options with a little algebra. The equation for a budget line is:
where P and Q are price and quantity of round trips ( RT ) and phone calls ( PC ) (per minute). In Jeremy’s case the equation for the budget line is:
If we choose zero through five round trips (column 1), the table below shows how many phone minutes can be afforded with the budget (column 3). The total utility figures are given in the table below.
Adding up total utility for round trips and phone minutes at different points on the budget line gives total utility at each point on the budget line. The highest possible utility is at the combination of one trip and 160 minutes of phone time, with a total utility of 1120.
The first step is to use the total utility figures, shown in the table below, to calculate marginal utility, remembering that marginal utility is equal to the change in total utility divided by the change in trips or minutes.
Note that we cannot directly compare marginal utilities, since the units are trips versus phone minutes. We need a common denominator for comparison, which is price. Dividing MU by the price, yields columns 4 and 8 in the table below.
Start at the bottom of the table where the combination of round trips and phone minutes is (5, 0). This starting point is arbitrary, but the numbers in this example work best starting from the bottom. Suppose we consider moving to the next point up. At (4, 40), the marginal utility per dollar spent on a round trip is 25. The marginal utility per dollar spent on phone minutes is 190.
Since 25 < 190, we are getting much more utility per dollar spent on phone minutes, so let’s choose more of those. At (3, 80), MU/P RT is 30 < 150 (the MU/ PM ), but notice that the difference is narrowing. We keep trading round trips for phone minutes until we get to (1, 160), which is the best we can do. The MU/P comparison is as close as it is going to get (40 vs. 70). Often in the real world, it is not possible to get MU/P exactly equal for both products, so you get as close as you can.
This is the opposite of the example explained in the text. A decrease in price has a substitution effect and an income effect. The substitution effect says that because the product is cheaper relative to other things the consumer purchases, he or she will tend to buy more of the product (and less of the other things). The income effect says that after the price decline, the consumer could purchase the same goods as before, and still have money left over to purchase more. For both reasons, a decrease in price causes an increase in quantity demanded.
This is a negative income effect. Because your parents’ check failed to arrive, your monthly income is less than normal and your budget constraint shifts in toward the origin. If you only buy normal goods, the decrease in your income means you will buy less of every product.
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Microeconomics | 13th Edition
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Chapter 6 Cengage Microeconomics. Suppose the demand for classical music concert tickets is downward slopping and the supply of classical music concert tickets is upward sloping. Fans of classical music persuade congress to impose a price ceiling of $40 per concert ticket. T/F: If the equilibrium price of concert ticket were $30, a price ...
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Suppose the demand for the picture frames is elastic and supply is inelastic. A tax of $1 per frame levied on buyers of picture frames will increase the equilibrium price paid by buyers of picture frames by. a positive amount, but less than $0.50. Microeconomics Chapter 6 Homework. To say that a price ceiling is binding is to say that the price ...
Principles of Microeconomics | 7th Edition. ISBN-13: 9781285165905 ISBN: 128516590X Authors: N Gregory Mankiw Rent | Buy. This is an alternate ISBN. View the primary ISBN for: Principles of Microeconomics 7th Edition Textbook Solutions.
Step-by-step solution. Step 1 of 5. (a) The money that could be spent on new car can be used for their spending on food, clothing, children's education family vacation expenses, savings etc. Step 2 of 5. (b) Member of congress will trade off with other important national expenses such as national defense, development of infrastructure ...
Introduction to Demand and Supply; 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services; 3.2 Shifts in Demand and Supply for Goods and Services; 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process; 3.4 Price Ceilings and Price Floors; 3.5 Demand, Supply, and Efficiency; Key Terms; Key Concepts and Summary; Self-Check Questions; Review Questions
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Step-by-step solution. Step 1 of 5. (a) The money that could be spent on new car can be used for their spending on food, clothing, children's education family vacation expenses, savings etc. Step 2 of 5. (b) Member of congress will trade off with other important national expenses such as national defense, development of infrastructure ...
The most popular and widely-used text in today's economics classroom, Mankiw's PRINCIPLES OF MICROECONOMICS, 8E continues to offer an approachable, superbly written introduction to microeconomics that allows all types of learners to quickly grasp economic concepts and build a strong foundation using relevant examples and powerful student-focused resources.
An external cost is best defined as the cost of an activity paid for by. a. the individual who is engaged in the activity. b. the government. c. a third party. d. a free-rider. e. the individual and the third party. 5. For a market to work efficientl y. a. the external costs must be paid.
9780357133484. Publisher. Cengage Learning. Subject. Economics. Access all of the textbook solutions and explanations for Mankiw's Principles of Microeconomics (MindTap Course List) (9th Edition).
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Transcribed image text: CENGAGE MINDTAP Homework (Ch 08) 4. The Laffer curve Government-imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for cigarettes, which is shown on the following graph.
Not constant; Upper part is elastic, lower part is inelastic. Suppose that at a price of $2.00 per bushel, the quantity supplied of corn is 25 million metric tons. At a price of $3.00 per bushel, the quantity supplied is 30 million metric tons. What is the elasticity of supply for corn?
Step-by-step solution. Step 1 of 8. Market is a mechanism which connects buyers with sellers to carry out transactions. It helps the economy in efficient allocation of scarce resources. It is found for commodities as well as for factors used in manufacturing commodities. The problem is related with factor market.