ECO
Professor
Problem Set #3
Name: ________________________________________________________________________
- Complete the following table of Scout’s utility from drinking cans of soda and answer the questions below.
| Cans of Soda | Total Utility | Marginal Utility |
| 0 | 0 | |
| 1 | 10 | |
| 2 | 22 | 12 |
| 3 | 32 | |
| 4 | 8 | |
| 5 | 4 | |
| 6 | 44 | |
| 7 | 42 |
- At what point does marginal utility begin to fall?
- Will Scout consume the seventh can of soda? Explain your answer.
- True or false? Scout will be following the utility-maximizing rule by consuming two cans of soda. Explain your answer.
- The following table gives the marginal utility of John’s consumption of three goods: A ($2), B ($1), and C ($3).
| Units of Consumption | MU of A | MU of B | MU of C |
| 0 | — | — | — |
| 1 | 20 | 25 | 45 |
| 2 | 18 | 20 | 30 |
| 3 | 16 | 15 | 24 |
| 4 | 14 | 10 | 18 |
| 5 | 12 | 8 | 15 |
| 6 | 10 | 6 | 12 |
- Good A costs $2 per
unit, good B costs $1, and good C costs $3. How many units of each should a
consumer with $12 buy to maximize his or her utility?
- How will the answer change if the price of B rises to $2?
- How about if the price of C is 50 cents but the other prices are as in a?
- Suppose a large cheese pizza costs $10 and a calzone costs $5. You have $40 to spend. The marginal utility (MU) that you derive from each is as follows:
| Number | MU of Pizza | MU of Calzone |
| 0 | — | — |
| 1 | 60 | 30 |
| 2 | 40 | 28 |
| 3 | 30 | 24 |
| 4 | 20 | 20 |
| 5 | 10 | 10 |
- How many of each would you buy?
- Suppose the price of a calzone rises to $10. How many of each would you buy?
- Use this to show how the principle of rational choice leads to the law of demand.
- Two firms have entered an agreement to set prices. The accompanying payoff matrix shows profit for each firm in a market depending upon whether the firm cheats on the agreement by reducing its prices.
| Firm B | |||
| Cheats | Does not cheat | ||
| Firm A | Cheats | A: $0 B: $0 | A: $100 B: −$50 |
| Does not cheat | A: −$50 B: $100 | A: $50 B: $50 |
- What is the dominant strategy for each firm, if any?
- What is the Nash equilibrium, if any?
- Two people are arrested and charged with the same crime. Each is given the opportunity to accuse the other of the crime. The payoff matrix shows how much time each will serve depending on who rats out whom.
| Prisoner B | |||
| Accuses A | Remains silent | ||
| Prisoner A | Accuses B | A: 2 years B: 2 years | A: Goes free B: 10 years |
| Remains silent | A: 10 years B: Goes free | A: Goes free B: Goes free |
- What
is the dominant strategy for each, if any?
- What is the Nash equilibrium, if any?
- Name two advantages and two disadvantages of
the behavioral model.
Instructions: You may select more than one answer. Check or circle for correct answers and click to empty the box for the wrong answers.
| Advantages include: | Disadvantages include: |
| Each model depends on a specific context, and they are not easily generalized to other contexts. They assume people are rational, which better matches reality. Irrational behavior results in complicated models that are often difficult to solve. They better match observed behavior. Broader building blocks free researchers to look for more patterns in the data. | Broader building blocks free researchers to look for more patterns in the data. Each model depends on a specific context, and they are not easily generalized to other contexts. They better match observed behavior. They place strict assumptions about rationality that often do not match reality. Irrational behavior results in complicated models that are often difficult to solve. |
- What are three types of choices in which nudges
are useful?
Instructions: You may select more than one answer. Check or circle for correct answers and click to empty the box for the wrong answers.
| Infrequent choices. | |
| Choices determined by shadow prices. | |
| Choices in a perfectly competitive market. | |
| Choices in which benefits and costs are separated by time. | |
| Complicated choices with many dimensions. | |
| Choices that are presented in context. |
- Identify the following as either a nudge, a
push, or neither.
- The cover of your state tax forms reports that 90 percent of residents pay taxes on time.
- If your friends gain weight, you are likely to gain weight too.
- Amazon is required by government to set the default mail option as the standard mail rate.
- Government taxes in part to redistribute income.
- A health insurer issues participants credits for exercising and eating healthy foods that they can use to buy products.
- In
“Valuing Reduced Risks to Children: The Case of Bicycle Safety Helmets,”
economists Robin R. Jenkins, Nicole Owens, and Lanelle Bembenek Wiggins estimate
the value of the lives of children by using parents’ willingness to purchase
bicycle helmets. Wearing a helmet reduces the probability of death from
bicycling by 0.0000041. The annualized cost of a helmet is $6.51.
- What economic concept is their study based on?
- Assuming helmets are worn 100 percent of the time, what is the value of life parents place on a child as revealed by their purchase of a bicycle helmet?
- What happens to the value-of-life estimate if parents expect their children to wear the helmets less than 100 percent of the time?
- What are the three main goals of macroeconomies? How do micro concepts influence each goal?
