Do problems 3.1—3.8, 3.10—3.12 in the textbook, Chapter 3,
and 4.2, 4.4, 4.6, 4.7, 4.8, 4.9, 4.12. Here are some additional problems.
1. The EZ software company sells word processing software to schools and corporations giving a quantity discount. They charge $100 for the first unit, $50 each for units 2 through 10, and $20 each for each unit beyond 10. Your organization has $1000. Draw the budget line for your organization using "All other goods" on the vertical axis and units of EZ Software on the horizontal axis. Label how much EZ software can be purchased if all of the budget is used on this item.
2. Assume
that there are only two goods, food (F) and clothing (C). Put Food on the horizontal axis. Draw a set
of indifference curves, linear budget constraints, and the income consumption
curves consistent with:
a) Food being a normal good
b) Food being an inferior good (make
it very inferior)
c) A Giffen good is one for
which the quantity demanded increases when the price increases. Using the same
set of indifference curves as in b), but with budget constraints for
alternative prices, show the price consumption curve when food is a Giffen good
along some range of prices.
d) Use your diagrams from b and c to
argue that a good cannot be a Giffen good for all levels of income and
prices.
3. It
is often noted that movie theaters usually charge high prices for large
packages of candy. For example, a
theater may charge $3.00 for a package that is six ounces, instead of offering
six packages weighing one ounce each for $.50 apiece. Use indifference curves and budget constraints to show why this
pricing system may induce consumers to buy more candy than they would
otherwise. Be sure to worry about the
discreteness (i.e., lumpiness) of the purchase decision when in the theater.