Week 3 Assignment 1
Date Submitted: 9/29/12
Chapter 5: Applied Problem 1
Bridget has limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Bridget's utility, while the last pound added 40 units.
a) Is Bridget making the utility-maximizing choice? Why or why not? In simplest terms wine is 50units/$10 = 5 and cheese is 40units/$4 = 10. Bridget is taking away dollars from cheese to buy why. Thus, she is not maximizing her choice.
b) If not, what should she do instead? Why?
She should trade the bottled of wine for more cheese to maximize her choice.
Chapter 6: Applied Problem 1
In an article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise its price from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year. The paper's publisher rejected this idea, saying that circulation could drop sharply after a price increase, citing the Wall Street Journal's experience after it increased its price to 75cents. What implicit assumptions are the publisher and analyst making about price elasticity?
The Wall Street Analyst is saying that the paper has low elasticity, or low price sensitivity. He thinks that the customers won’t response negatively to a price increase thus helping the paper raise revenue.
The Wall Street Publisher thinks the opposite. He believes the paper has high elasticity and price sensitivity which will result in customers reacting negatively to a price increase. The price increase will not be successful because they will also lose customers in the process.
Chapter 7: Applied Problem 1