EXERCISES AND PROBLEMS
1. Consider two choices you made yesterday. Describe the rationale for those choices in the terms of the chapter. Force it to work. (Identify in particular the marginal utility, the relevant constraints, and substitutes.)
2. Determine the demand for any good - your own pick - in your environment by asking a selected group of people the amounts they would buy at different price levels. Draw the demand curve in a diagram.
3. Identify which of the following goods are substitutes for cars. And which are complements?
A. pick-up trucks
B. airline tickets
E. tolls on the highway
4. After the Great Chicago Fire of 1871, M % of the housing had been destroyed. The remaining housing sold for more than the whole city had been worth before the Fire. Use marginal and total valuations to show how this could be. Does the higher value in exchange for the buildings mean that Chicagoans on the whole were made better off by the Fire?
5. Student's question: Why would I not keep buying something as long as its marginal utility is greater than zero? For than I keep adding to my total utility. Answer the student.
ESSAY AND DISCUSSION QUESTIONS
6. Paul says: "I never think in terms of utility. This neoclassical theory of demand must therefore be false." Give the neoclassical rebuttal to Paul's statement.
ANSWERS TO CONCEPT CHECKS
1. By saying that doctors "deserve" their earnings, Paul gives a moral justification of their worth. An economist would want him to think in terms of supply and demand. Apparently the demand for and supply of doctor's services warrants the high price. As we will show later, doctors have been able to restrict competition - from foreign doctors, for example - -and get higher prices than the competitive conditions warrant. Yet what they get is what they get: value is price, said the cynic and the neoclassical economist.
2. That first coke of day is a delight. The next is less delightful, though still fine. Taking it to the extreme, when you're drinking fifty cokes a day the extra pleasure you get from the 51st one is probably very small.
3. No. For example, the government getting the loan can simply report high-value projects as the ones it is using the money "for," the way you report buying a refrigerator. It is going to finish the high-value projects anyway, whether or not the World Bank gives it additional money. Why? Because they are of such high value. They are going to get done anyway. The government can even promise to use the very dollar bills from the Bank "for" some wonderful, high value project - milk for babies, say, or schools for children. But the effect of the extra money from the Bank is always to make it possible for that country's government to take on some lower-value project that it would not otherwise take on, such as building a swimming pool for the idle rich. The low-value project is the marginal one.
4. The additional to utility from the first gallon for her is $3.00. It's also the maximum she would be willing to pay. The additional (marginal, extra) utility from the second is $2.00, for total of 3 = 2 = 5 so far. The marginal utility from the third is $1.50, for a running total of $6.50. And from the fourth, $1.10, for a total of $7.60. That's how much she would be willing to pay at most for what she buys. It is the money value she puts on her total utility from gasoline. Like water, the total utility of gasoline can be high yet the marginal utility of the last gallon purchased small.)