Intermediate Microeconomics HW 2 Risk Demand SE IE 1. Monica has preferences U = c`, has H = 16 hours in her day and can earn wage w = 20. Treating c as a numeraire consumption good, what level of...

Worksheet is attached below


Intermediate Microeconomics HW 2 Risk Demand SE IE 1. Monica has preferences U = c`, has H = 16 hours in her day and can earn wage w = 20. Treating c as a numeraire consumption good, what level of consumption c will Monica choose? If the wage goes up to w = 20 but the price of consumption increases to p = 2 is Monica better or worse off? 2. Monica has preferences U = c21c2 (she prefers to consume more of her wealth today). Monica receives income of Y1 = 100 today and Y2 = 110 tomorrow. The interest rate for saving or borrowing is r = 0.1. What levels of consumption c1 and c2 will Monica choose? 3. Use a graph to argue that if a consumer is a borrower and remains a borrower after the interest rate decreases, then the borrower must be better off. 4. Use a graph to depict a consumer who was a borrower but becomes a lender after the interest rate decreases. (Hint: try different ‘endowments’) 1 5. Sally’s preferences can be represented by U = x2y and the associated indifference curves are given in the following diagram. Sally has an income of $9 to spend on magazines (x) and books (y). The price of books is $1 and the price of magazines is $1. Her budget is labeled BC2.How many books and magazines does sally consume? (round to the nearest integer) If the price of magazines increases to 2, her budget becomes BC in the diagram. How many books and magazines does Sally consume? Do your best to draw the appropriate budget constraint and, based on the budget constraint, calculate the maximum amount of money that Sally would be willing to pay to avoid the price change (the equivalent variation of the price change - do not round your answer to the nearest integer). If the price change were the result of a $1 tax on magazines, how much revenue would be generated by the tax? If the government could tax Sally’s income, what is the largest amount of money they could collect from Sally while leaving her as happy as the magazine tax? Draw the budget constraint associated with the compensating variation of this price change. Using her choice from this compensated budget, what is the Sub- stitution Effect and what is the Income Effect of the price change? U1 U2 BC BC2 1 1 magazines books 2 6. Your first job after college is a management position with Jiffy and your boss has asked you to determine what will happen to the company revenue if they increase the price of their product from $0.89 per box to $1 per box. Using the elasticity for food from Blundell, what is the approximate change in revenue you would expect? (please show your work - you are new, and the boss is going to want to confirm that your approach is correct before they believe your answer) 7. The demand function with constant elasticity is D = A∗pε. According to Federal reserve data from FRED St. Louis, the price p of West Texas Intermediate in Cushing Oklahoma was about $100 for most of 2014. The total expenditure on fuel D was estimated to be $27 billion in 2014. If expenditure on oil equals price times quantity, p ∗D, what quantity of oil was purchased in 2014? Plug in the known values, including the (own price) elasticity ε from Blundell 1988, to get an approximate value for A. What does A equal? When the price falls to $50, what quantity of fuel do you expect to be demanded? What would be the total expenditure on this quantity? The actual expenditure on petroleum is reported to be approximately $22 billion in 2015, is your prediction close to the observed value? (side note: the quantities you calculate as an intermediate step in this question do not match data that I know of - possibly because there are many different petroleum products and WTI is just one of many prices) 3