Chapter 10

For each of the following situations, decide whether Al has diminishing marginal utility. Explain. a. The more economics classes Al takes, the more he enjoys the subject. And the more classes he takes, the easier each one gets, making him enjoy each additional class even more than the one before. b. Al likes loud music. In fact, according to him, "the louder, the better." Each time he turns the volume up a notch, he adds 5 utils to his total utility. d. Al loves toasted marshmallows. The more he eats, however, the fuller he gets and the less he enjoys each additional marshmallow. And there is a point at which he becomes satiated: beyond that point, more marshmallows actually make him feel worse rather than better. c. Al enjoys watching reruns of the old sitcom Friends. He claims that these episodes are always funny, but he does admit that the more he sees an episode, the less funny it gets.

Bruno can spend his income on two different goods: Beyoncé MP3s and notebooks for his class notes. For each of the following three situations, decide if the given consumption bundle is within Bruno's consumption possibilities. Then decide if it lies on the budget line or not. a. $\mathrm{MP}3\mathrm{s}$ cost $$2each,andnotebookscost\text{(}\mathrm{\$}3each.Brunohasincomeof\text{)}60.Heisconsideringaconsumptionbundlecontaining\text{(}15\mathrm{MP}3\mathrm{s}\text{)}and10notebooks.b.MP3scost\text{(}\mathrm{\$}2each,andnotebookscost$$ 5 each. Bruno has income of \)$ 110 . He is considering a consumption bundle containing $20\mathrm{MP}3\mathrm{s}$ and 10 notebooks. c. MP3s cost $\mathrm{\$}3each,andnotebookscost$$ 10 each. Bruno has income of $\mathrm{\$}50.Heisconsideringaconsumptionbundlecontaining$10 \mathrm{MP} 3 \mathrm{~s}$ and 3 notebooks.

Sven is a poor student who covers most of his dietary needs by eating cheap breakfast cereal, since it contains most of the important vitamins. As the price of cereal increases, he decides to buy even less of other foods and even more breakfast cereal to maintain his intake of important nutrients. This makes breakfast cereal a Giffen good for Sven. Describe in words the substitution effect and the income effect from this increase in the price of cereal. In which direction does each effect move, and why? What does this imply for the slope of Sven's demand curve for cereal?

Restaurant meals and housing (measured in the number of rooms) are the only two goods that Neha buys. She has income of $\mathrm{\$}1,000.Initially,shebuysaconsumptionbundlesuchthatshespendsexactlyhalfherincomeonrestaurantmealsandtheotherhalfofherincomeonhousing.Thenherincomeincreasesby$50 \%$,butthepriceofrestaurantmealsincreasesby$100 \%$ (it doubles). The price of housing remains the same. After these changes, if she wanted to, could Neha still buy the same consumption bundle as before?

Margo's marginal utility of one dance lesson is 100 utils per lesson. Her marginal utility of a new pair of dance shoes is 300 utils per pair. The price of a dance lesson is $\mathrm{\$}50$ per lesson. She currently spends all her income, and she buys her optimal consumption bundle. What is the price of a pair of dance shoes?