Self-Check Questions
Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of $2 in gasoline money. He has a total of $10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values given in Table 6.11, figure out the points on Jeremy’s consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.
| Round Trips | Total Utility | Phone Minutes | Total Utility |
|---|---|---|---|
| 0 | 0 | 0 | 0 |
| 1 | 80 | 20 | 200 |
| 2 | 150 | 40 | 380 |
| 3 | 210 | 60 | 540 |
| 4 | 260 | 80 | 680 |
| 5 | 300 | 100 | 800 |
| 6 | 330 | 120 | 900 |
| 7 | 200 | 140 | 980 |
| 8 | 180 | 160 | 1,040 |
| 9 | 160 | 180 | 1,080 |
| 10 | 140 | 200 | 1,100 |
Take Jeremy’s total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremy’s utility.
Explain all the reasons why a decrease in the price of a product would lead to an increase in purchases of the product.
As a college student you work at a part-time job, but your parents also send you a monthly allowance. Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?
Siddhartha has 50 hours per week to devote to work or leisure. He has been working for $8 per hour. Based on the information in Table 6.12, calculate his utility-maximizing choice of labor and leisure time.
| Leisure Hours | Total Utility from Leisure | Work Hours | Income | Total Utility from Income |
|---|---|---|---|---|
| 0 | 0 | 0 | 0 | 0 |
| 10 | 200 | 10 | 80 | 500 |
| 20 | 350 | 20 | 160 | 800 |
| 30 | 450 | 30 | 240 | 1,040 |
| 40 | 500 | 40 | 320 | 1,240 |
| 50 | 530 | 50 | 400 | 1,400 |
In Siddhartha’s problem, calculate marginal utility for income and for leisure. Now, start off at the choice with 50 hours of leisure and zero income, and a wage of $8 per hour, and explain, in terms of marginal utility how Siddhartha could reason his way to the optimal choice, using marginal thinking only.
How would an increase in expected income over one’s lifetime affect one’s intertemporal budget constraint? How would it affect one’s consumption/saving decision?
How would a decrease in expected interest rates over one’s working life affect one’s intertemporal budget constraint? How would it affect one’s consumption/saving decision?