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Problem Set # 1 Econ 281 Due Date: 11:59 pm, Sept. 26, 2022 For problems 2 and 3, show your work and express your answer in a short sentence. Unless otherwise stated, assume that fractional units of goods can be produced and sold (meaning answers do not necessarily need to be whole numbers). Round your final answers to two decimal places when necessary. Problem 1 (24 Marks) For each example, draw three indifference curves that represent the given preferences. You are free to provide me with any set of indifference curves that would fit the description. Please also show the direction of increasing utility. (a) Melissa spends essentially all her free time on one of two things: either watch- ing baseball highlights, or munching on chips. Both of these pastimes fill her life with joy. However, she does find that if she focuses too much time on one activity over the other, she starts to get a bit tired of it. (b) Ben loves jelly beans. However, he is very picky about flavours – he only eats the red and the green ones. He especially likes the green ones. In fact, no mat- ter what, he will always be willing to trade four red ones in exchange for one green one. (c) Meera is obsessed with coffee. However, it needs to be made a very specific way – she wants 1/3 of each drink to be milk, and the rest coffee. If the ratio is even a little bit off, the cup is ruined and she gets no pleasure from it whatsoever. (d) Carlos loves to binge watch shows on Amazon Prime. His two favourites right now are “Rings of Power” and “Wheel of Time.” He never stops enjoying watching either show. But with each individual show, each additional episode he watches gives him more enjoyment than the episode before. . . . . . . . . . Problem 3 2 Problem 2 (40 Marks) Jackie consumes only two goods: waffles (w), and concert tickets (t). Her utility function and associated marginal utilities are as follows: U = 1200w0.1t0.4 MUw = 120w −0.9t0.4 MUt = 480w 0.1t−0.6 Each waffle costs $2.50 and each concert ticket costs $20. (a) How much money would Jackie need to achieve utility = 10,000? (b) From now on, assume Jackie has $1000 to spend. How many waffles and con- cert tickets will Jackie consume? (c) Suppose waffles cost $4 each instead of $2.50. How many waffles and concert tickets will Jackie consume? (d) Find the substitution and income effects for the change from part (b) to (c). (e) Find the Compensating and Equivalent Variations for the change from part (b) to (c). (f) Suppose Jackie’s utility function was actually the following: U = 1200w0.5 + 160t MUw = 600w −0.5 MUt = 160 Assuming again that each waffle costs $2.50 and each concert ticket costs $20, and Jackie has $1000 to spend, how many waffles and concert tickets will Jackie consume? . . . . . . . . . Problem 3 (36 Marks) Suppose there two types of consumers in the market for fidget spinners. There are 3000 Type A consumers, each of which has the following individual inverse demand curve: P = 4− qA 3 (where qA is the number of fidget spinners demanded by each type A consumer, and P is the unit price of fidget spinners). There are 7000 Type B con- sumers, each of which has the following individual inverse demand curve: P = 5− qB 2 . Econ 281 PS # 1 Problem 3 3 (a) Find and graph the equation for the fidget spinner market demand curve. (b) Suppose that the equation for the fidget spinner market supply curve is Qs = 31000 + 2000P (where Qs is the total number of fidget spinners supplied on the market). Using the market demand curve found in part (a), solve for the equilibrium quantity and price. As well, find the price elasticity of demand at this point. (c) Now suppose a global pandemic hits, shutting down some of the factories that produce fidget spinners. As a result, at every price level 30,000 fewer fidget spinners are supplied on the market. Using the new supply curve that results from this change, as well as the demand curve found in part (a), solve for the new equilibrium quantity and price. . . . . . . . . . Econ 281 PS # 1