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Tutorial 5 Answer Micro

The document discusses the effects of price ceilings on gasoline, indicating that a price ceiling of $1.40 would create a shortage. It also explores the relationship between after-tax wages and labor supply, highlighting the substitution and income effects. Additionally, it examines the law of diminishing marginal utility in relation to the consumption of movies and books.

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nur asyiqin
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19 views2 pages

Tutorial 5 Answer Micro

The document discusses the effects of price ceilings on gasoline, indicating that a price ceiling of $1.40 would create a shortage. It also explores the relationship between after-tax wages and labor supply, highlighting the substitution and income effects. Additionally, it examines the law of diminishing marginal utility in relation to the consumption of movies and books.

Uploaded by

nur asyiqin
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
a) + S-7 8. (a) %AQ+ %AP=0.2 souurions 70 Thus, %AP=%AQ + 0.2 = 109 + 0.2 = 0.10 + 0.2 = 0.50 = 50%. Price would rise ight be long lines at gas stations and perhaps a black market in gasoline. CHAPTER 6 to $2.10. (b) A price ceiling at $1.40 per gallon would create a shortage of gasoline. The result a a MU soo 0 390 Tu 70 : 00 o 250 so Foon “0 150 so 100 20 0 : wo orrs4se7 orzs4567 [Number of cookies #0F COOKIES Number ofcookis [MARGINAL UTILITY 100 100 ‘The maximum that he would buy would be 6 because the seventh yields no marginal utility 4. (a) (by $-8 sowmons 10 © © EVEN-NUMBERED PROBLEMS: ¥ 7 2 “ ° ° =o Oe Ox 2 « rn x 6. This statement is backwards. An increase in the “after tax” wage will have a positive effect on the labor supply only if the substitution effect outweighs the income effect. The substitution effect states that a higher wage makes the opportunity cost of leisure increase, ‘Thus, people tend to substitute working for leisure. The substitution effect alone suggests that a higher after-tax wage leads to more labor supply. On the other hand, if the after-tax wage goes up, people are better off. Assuming leisure is a normal good, the higher wage sug- ests that people will consume more leisure and work less. 8. (a) Disagree. If the income effect of a wage change dominates the substitution effec, ‘we know that a wage increase will cause additional consumption of leisure and less work + and that lower wages will cause additional work. .. increased labor supply. Thus, if our houschold works more, it must have been a wage cut. (b) Disagree. In product markets, a price cut makes households better off... higher real income. Thus, for normal goods, the income effect leads to more consumption of the good. 10. (a) Movies #PER MONTH TU MU MU/S mu/s 1 5050625 1 2 2 110 2 8 30378 2 2% 100 3 10020250 3 2 10 50 4 uo 10125, 4 os on 5 ue 65 5 o 3 15 6 m5 os 8 ei 10 7 1 7 aaa 05 (b) Yes, these figures are consistent with the law of diminishing marginal utility, which states that asthe quantity of a good consumed increases, utility also increases, but by less and less for each additional unit. Inthe tables, the TU figures for both books and movies are increasing, but as more movies or more books are consumed, the MU diminishes. (©) Five movies and two books. To maximize utility, the individual should allocate income toward those goods with the highest marginal utility per dollat. The first four movies have a higher marginal utility per dollar than the first book so the person

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