PLEASE EMAIL ME THE ANSWERS AT THANKS HW DUE ON SEPTEMBER 30TH 1. In all these problems, the consumer is choosing to spend all…


1.  In all these problems, the consumer is choosing to spend all his income on

either pizza or Dr. Pepper. In all graphs, put Dr. Pepper on the vertical axis.

a) Draw the budget of a person who has $150 and Dr. Pepper costs $2 per unit

and pizza costs $15 per unit specifically labeling the intercepts. Explain whether

or not it is possible for the consumer’s utility maximizing bundle to be 7 pizzas

and 30 Dr. Peppers (1 point)

b)  There is a demand curve of pizza for this individual contains the following 2 points:

P      Q$10  6

$5   12

This person has $150 in income and chooses to buy 30 Dr. Peppers when the price of pizza is $10 and when the price of pizza is $5. Draw the budget constraint when the price of pizza P = $5 and when the price of pizza P = $10.

Draw both of these budget constraints together on a new graph, but not the same graph as in (a). Specifically label the intercepts of each constraint.  Find the

coordinates of the utility maximizing point on each budget and draw the indifference curve through that point. Finally, find the MRS at each of the optimal

points. (3 points)

c) If we knew that, for the budget in (a) the utility maximizing bundle contained 4 pizzas, would this information tell us a 3rd point on the demand curve in (b) ?

Why or why not. (1 points)

2.  Consider a consumer with $10 to spend on these two goods where the price of apples is always $2 each.

Apples               Oranges

Q    U                     Q    U

1     50                   1     30

2    75                    2    56

3    85                   3     78

4    90                   4    96

5    92                   5   108

6    93                   6   116

a) Find the utility maximizing combination of apples and oranges if oranges cost $4 each. Explain why the consumer didn’t choose the bundle of 3 apples and 4 oranges.  (1 point)

b) Repeat all of part (a) if oranges cost $1 each.  (1 point)

3.  Let’s explore the business of Farmer Ted. The farmer has two fixed inputs that he owns:  A tractor, which Ted can rent out for $24000 per year if he doesn’t

use it on his farm at all in the year, and land which is currently valued at 1 million dollars. The only variable input is labor. The output of the farm per year

depends on the quantity of labor hired per year in the following way:

L         Q                    L       Q

1          10,000          6       90,000

2          25,000         7       100,000

3         45,000         8       106,000

4         63,000         9       108,000

5         78,000        10       107,000

Ted  is  currently  producing  100,000  bushels  of  hops  per  year  for  which  he receives  a  price  of  $2  per  bushel.   Ted  pays  $10,000  per  worker  per  year.

Currently  Ted  does  no  work  on  the  farm.   He  instead  works  as  a  stockbroker earning $50,000 per year. Being a stockbroker, he is aware of opportunities that

would allow him to invest his money safely and earn 10%.

a) Find the economic profit per year for Ted’s farm at current production levels.

How will this number look different than the accounting profit described by Ted’s bookkeeper? (2 points)

b)   Ted  is  worrying  that  the  farm  is  not  as  profitable  as  he  would  like .   He  decides  to  do  some  of  the farm  work he  is  currently  paying  for.   He  would  no

longer have time to do his work as a stockbroker   but would still be aware of the same investment opportunities. If Ted has the same farming skills as a person he  hires  and  wants  to  keep  the  same  level  of  production,  show  what  would happen to his accounting and economic profit with this decision Is this a good

idea?  Would  it  be  a good  idea  if  Ted  was  a s  productive  as  two  workers?   (1 point)

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