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Tutorial 6 Answer Micro

The document discusses the effects of price changes and wage increases on supply and demand, highlighting that a price ceiling can lead to shortages and potential black markets. It also explains the relationship between after-tax wages and labor supply, emphasizing the substitution and income effects on leisure and work. Additionally, it illustrates the law of diminishing marginal utility through examples of movie and book consumption, suggesting optimal allocation of income for maximum utility.

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nur asyiqin
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21 views2 pages

Tutorial 6 Answer Micro

The document discusses the effects of price changes and wage increases on supply and demand, highlighting that a price ceiling can lead to shortages and potential black markets. It also explains the relationship between after-tax wages and labor supply, emphasizing the substitution and income effects on leisure and work. Additionally, it illustrates the law of diminishing marginal utility through examples of movie and book consumption, suggesting optimal allocation of income for maximum utility.

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
8. (a) %AQ= %AP=02 soumionsto $7 Thus, %AP=%6AQ + 0.2 = 10% + 0.2 = 0.10 + 0.2 = 0.50 = 50%. Price would rise a to $2.10. (b) A price ceiling at $1.40 per gallon would create a shortage of gasoline, The result ‘ight be long lines at gas stations and perhaps a black market in gasoline. CHAPTER 6 2: es Mw 0 00 350 tu 70 30 o 250 50 2 aw ~ 150 x» 100 20 0 10 o1zs4s67 o1z3s4567 Number ofcookies umber of cookies # OF COOKIES. (MARGINAL UTILITY ‘The maximum that he would buy would be 6 because the seventh yields no marginal utility. ge F Gana $-8 sowutions to EVEN-NUMBERED PROBLEMS 4 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- gests that people will consume more leisure and work less. (a) Disagree. If the income effect of a wage change dominates the substitution effect, ‘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 household 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 Books EPERMONTH TU mu mu/s #PERMONTH TU MU -MU/S s 50625 1 nm 2 10 sm 3035 2 2 20 100 10020250 a 2 0 sO Mo 101.28 4 cn) 23 ms 6S 5 0 3 45 m5 es 6 2 2 30 wm 2 8 7 ieee 05 (b) Yes, these figures are consistent with the law of diminishing marginal utility, which states that as the quantity of a good consumed increases, utility also increases, but by less and less for each additional unit. In the 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 dollar. The first four movies have a higher marginal utility per dollar than the first book so the person

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