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Classwork - Consumer Choice & Market Demand
Classwork - Consumer Choice & Market Demand
Problem # 1 - Consumer Choice & Individual Demand - The chart to the right shows the marginal utility that Cookie Monster gets from consuming cookies and milk.
A. Cookie Monster has an income of $13. Cookies have a price of $1 and milk has a price of $3. How many cookies and how much milk will Cookie Monster buy? How much utility will he get from his purchases?
B. Suppose the price of cookies go up to $2. How will this affect amount of cookies and milk Cookie Monster purchases? How will this affect his total utility?
C. How does the change in the price of cookies show Cookie Monster's demand curve for cookies?
D. Suppose Cookie Monster's income goes up by $4. How will that change the amount of cookies and milk Cookie Monster buys? Are cookies and milk normal or inferior goods?
Link to Video Answer for this Problem - click here
Problem # 2 - Your friend Felix, after learning about your knowledge in economics, asks if you can help him with some of his consumer purchases down at the Fruit Store. He explains that he likes orenges, apples and bananas. His marginal utility is shown in the chart to the right:
A. He tells you that all fruit at the Fruit Store sells for $1. Felix tells you that he only has $9 to spend. How much of each good should Felix buy to maximize his utility?
B. After going to the store and making his purchases, Felix finds $2 on the ground. He picks it up and tells you he is going back to the store. He asks you what he should buy with the additional $2. Remember he just bought $9 worth of stuff and that the additional utility from the new purchases will be added to the utility from his previous purchases.
C. Before he could spend his $2, Felix comes out of the store confused – it seems that the price of oranges is now $2. How has this price change altered Felix’s decision about what to purchase? Besides limiting his choices, how does this effect Felix’s overall happiness or utility?
D. As your talking to Felix, Mr. McCourt overhears your conversation with Felix and interrupts. He explains how growing up in Ireland he was lucky to have potato, let alone any of this fancy fruit, and that Felix should get more enjoyment out of his money. Using economic language of utility and terminology to be polite, how can you tell Mr. McCourt to mind his own business?
E. After dealing with Felix and Mr. McCourt, you go into the store to buy some stuff. While you are in there, the manager complains to you that he is not making any money from selling oranges anymore because people are not buying them. How would you explain to the manager, using the example of your friend Felix, the effect that the price increase has orange sales?
Problem # 2 - Ernie and Bert both like to eat mini pizzas. Their individual demand curves are shown to the right.
A. What is the market demand curve?
B. The only place they can buy Mini Pizzas is at Mr. Hooper’s Store. The supply curve for this good is: Qs = 5P - 20. What is the equilibrium price and quantity in the market?
C. How many Mini Pizzas does Ernie buy? How much does Bert buy?
D. Mr. Hooper says he may have to raise the price of Mini Pizzas by $1. Based on Ernie and Bert, how would this price change show the Law of Demand? (Use numbers based on their demand curves to answer the question)
Homework # 2 - Consumer Choice & Market Demand (Answers)
Homework # 2 - Consumer Choice & Market Demand (Answers)
Printable Copy of Homework Sheet - click here
Problem # 1 - Arthur Aardvark lives in lives in Elmwood City and likes to eat ice cream, candy and going to the movies. The chart to the right shows the marginal utility he receives from each of these items. Use this information to help Arthur make decisions about how to spend his money to maximize his utility.
A. Arthur tells you that he has $9 to spend this weekend. He also tells you that ice cream cost $2, candy is $1 and going to the movies cost $10. How much of each item should he buy to maximize his utility? How much utility will he have?
B. When you go to the store, it turns out that ice cream is on sale and only costs $1. How will this change Arthur’s choices about how he spends his money? How does this affect his total utility?
C. How does the change in price show the Law of Demand?
D. Arthur’s friend Buster Bunny comes up to you and says, “That Arthur – all he does is eat ice cream and cookies and go to the movies. If these things were free, I don’t think he would ever stop eating eat ice cream and cookies and going to the movies.” Is Buster right? Explain.
E. The following weekend, you meet Arthur again and he is very happy. He tells you that his allowance has been increased and he now has $10 to spend. How much of each item should now he buy to maximize his utility? How does the extra dollar affect his total utility?
F. Comparing the way Arthur spends his money each weekend, which goods (ice cream, candy and movies) are normal goods and which are inferior goods? Explain.
Problem # 2 - Individual & Market Demand - The chart to the right shows the individual demand curves for three people who buy a good in a market and the supply curve for the market.
A. What is the market demand curve?
B. What will be the equilibrium price and quantity in this market?
C. How much will each person buy in this market?
An improvement in technology shifts the market supply curve outward. The new supply curve is shown to the right.
D. What is the new equilibrium price and quantity in this market?
E. How much will each person buy in this market?
Link to Video Answer for this Problem - click here
F. Use the information about the quantity sold in the market at the two different prices to calculate the elasticity of the market.
G. Use the information about the quantity purchased by each person in the market at the two different prices to calculate each person's elasticity. How does the market elasticity compare to the elasticity of each individual?
Link to Video Answer for this Problem - click here
Homework # 3 - Behavioral Economics
Homework # 3 - Behavioral Economics
Reading - Behavioral Economics - click here
Printable Copy of Assignment - click here
Power Point on Behavioral Economics Terms - click here
Video - How Economists Think Differently From Other Humans - click here
Video - Battle Between Behaviorists and Rational Economics - click here
Video - Neuroeconomics and Shopping: Don’t Ask the Person, Ask the Brain - click here
Problem # 1 - Curious George buys bananas for a $ 1 each and coconut juice for 50 cents a carton. Currently, the marginal utility of the last banana he bought is 80 utils and the marginal utility for the last carton of coconut juice is 100 utils. Is Curious George buying the utility maximizing combination of bags of bananas and coconut juice? If not, how should he reallocate his expenditures between the two goods? (i.e. buy more or less of each good)?
Problem # 2 - Tourist Ted is planning his 7 day post-pandemic vacation to the island of St. Sol and trying to decide how many days to spend on the beach, going diving and fishing. He can only do one activity each day. The marginal utility he gets from each activity is shown in the chart to the right.
The guide to the island says that a day at the beach costs $1, a day of diving costs $10 and a day of fishing costs $5.
Tourist Ted has budgeted $30 to spend on activities. Whatever money he does not spend in 7 days, he will spend on souvenirs which give him a constant marginal utility of “1” for each dollar spent.
A. How much of each activity should he do during the 7 days he is on St. Sol?
B. How much total utility will Tourist Ted will get from the activities he will do during his 7 days on St. Sol?
C. When he gets down to St. Sol, Tourist Ted learns that one day of diving actually costs $20. How will Tourist Ted change his plans based on this information? How does it affect his total utility?
D. Comparing the number of times Tourist Ted goes diving when the price is $10 to the number of times he goes diving when the price is $20, is Tourist Ted’s elasticity of demand for diving elastic or inelastic? Explain with numbers
E. Comparing the number of times Tourist Ted goes diving when the price is $10 to the number of times he goes diving when the price is $20, does Tourist Ted’s decisions violate the Law of Demand?
Problem # 3 - Leonardo, Donatello and Raphael live in an apartment above their favorite sandwich shop. The equations to the right show each person's demand curve for the sandwiches they buy each month from the sandwich shop.
A. What is the market demand curve?
B. How many sandwiches does the sandwich shop sell and what is the price?
C. At that price, how many sandwiches does Leonardo, Donatello and Raphael each buy?
A new roommate, Michelangelo, moves into the apartment. He also likes to buy sandwiches at the sandwich shop. His demand curve is shown to the right.
D. What is the new market demand curve?
E. How has Michelangelo purchases at the sandwich shop affected the price and quantity of sandwiches sold at the shop?
F. At this price, how many sandwiches does Leonardo, Donatello, Raphael and Michelangelo each buy?
G. The addition of Michelangelo to the market is an example of the economic concept of "crowding out" - what do you think that phrase means?
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