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Chapter 1: Q3 (page 17)

Suppose that you initially have \(100 to spend on books or movie tickets. The books start off costing \)25 each, and the movie tickets start off costing \(10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease?

a. Your budget increases from \)100 to \(150, while the prices stay the same.

b. Your budget remains \)100, and the price of books remains \(25, but the price of movie tickets rises to \)20.

c. Your budget remains \(100, and the price of movie tickets remains \)10, but the price of a book falls to $15.

Short Answer

Expert verified
  1. The attainable set of combinations would increase.
  2. The attainable set of combinations would decrease.
  3. The attainable set of combinations would increase.

Step by step solution

01

Explanation for part (a)

The budget of the consumer increases from $100 to $150. The increase of $50 in the budget will allow the consumer to buy more quantities of both the goods. The budget line will shift to the right.

02

Explanation for part (b)

With a new price of $20, the consumer can buy a maximum of 5 movie tickets with a budget of $100. At the previous price of $10, the consumer could buy a maximum of 10 movie tickets with the same budget.

It shows that the new price level of movie tickets has decreased the maximum set of combinations they can buy.

03

Explanation for part (c)

At the new price of $15, the consumer can buy a maximum of 6 books with a budget of $100. At the previous price of $25, the consumer could buy a maximum of 4 books with the same budget.

It shows that the new price level of books has allowed the consumer to buy a higher quantity of books. It would increase the maximum set of combinations that they can buy.

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Most popular questions from this chapter

What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greater opportunity cost: allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? Explain.

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units.

a. 3,000 units at which MC = \(10 and MB = \)13.

b. 11 units at which MC = \(4 and MB = \)3.

c. 43,277 units at which MC = \(99 and MB = \)99.

d. 82 units at which MC < MB.

e. 5 units at which MB < MC.

Refer to Figure 1.3. Suppose that the cost of cheese falls so that the marginal cost of producing pizza decreases. Will the MC curve shift up or down? Will the optimal amount of pizza increase or decrease? Explain.

Why is money not considered to be a capital resource in economics? Why is entrepreneurial ability considered a category of the economic resource, distinct from labor? What roles do entrepreneurs play in the economy?

Starbucks has $1 billion to invest. It can either purchase a rival coffee shop chain or build additional Starbucks shops. If Starbucks chooses to purchase the rival chain, what does that say about the relative profitability of purchasing and owning the rival's existing shops versus building additional Starbucks shops? Explain.
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