MGT 1210 ASSIGNMENT #1

SUMMER 2013

Prof. V. Aivazian

QUESTION 1

a) His cost of playing golf is not $10 per week. We need to add the opportunity cost, which is 30*3*4=360. And the total cost is 370. b) One alternative brings 360 and the other brings 100.

The higher one is the opportunity cost. The total cost is still 370. c) Future potential benefit does not change the current cost, which is 500. So the cost of purchase is 500 d) Was the total social cost of this round of golf different from other rounds? Was Dr. Watson’s own cost of this round of golf different?

The total social cost of this round was different from others since this round added more social cost which were window damage. His own cost stayed the same.

QUESTION 2

This is an important distinction you should learn to recognize. a) Government regulation of the liquor industry has caused the price of liquor to be higher and the quantity supplied to be lower than it would have been in the absence of regulation. This is positive. b) Economic theory is based on human behaviour. This is positive. c) A 5% GST should be imposed on all items sold in Canada. This is normative since there is value judgment. d) First-come, first-served methods of allocation discriminate against individuals whose time is valuable. This is positive. e) The use of violence should be outlawed, since it discriminates in favour of the strong and aggressive.

This is normative since there is value judgment.

QUESTION 3

Suppose that initially A is consuming 1 unit of X and 7 units of Y while B is consuming 8 units of X and 4 units of Y. a) Show that mutually advantageous exchange can occur. If the exchange rate is 1:1, then A would like to pay 1 Y to get 1 X from B since the total utility increases by 14-12=2. And B would like to do this since his utility increase by 20-2=18. b) How far will exchange proceed between A and B if the exchange rate is originally set at 1X = 1Y.

In that case, trade happens for one time. If A exchanges again, his utility will decrease by 14-12=2. So A would not exchange.

c) When exchange comes to an end at the rate of 1X = 1Y, could exchange continue by setting a new exchange rate at 2X = 1Y? How far will exchange go?

In that case, the utility of A would increase by 12+10-14=8. And utility of B would increase by 16-8-4=4. Again it is win-win situation. So exchange would happen. After that, if the exchange continues, the utility of A would decrease by 16-6-8=2. So the exchange would only go for once.

| Individual A | Individual B | Q | MUX | MUY | MUX | MUY | 1 2 3 4 5 6 7 8 | 16 14 12 10 8 6 4 2 | 24 22 20 18 16 14 12 10 | 22 18 16 12 10 8 4 2 | 32 28 24 22 20 16 12 8 |

QUESTION 4

Suppose the marginal value of bread in terms of wine is ½ bottle of wine per loaf of bread, while the relative price of bread in terms of wine is ¼ bottle of wine per load of bread. Explain how the consumer can adjust his purchases to raise his level of satisfaction.

We can see that MUb/ Pb=1>MUw/Pw=1/2. So the consumer would consume more bread until MUb/Pb decreases to the value that equals MUw/Pw.

QUESTION 5

A consumer suddenly realized the MUx/Px < MUy/Py with his current commodity bundle. Is he maximizing his utility? If not, which commodity should he consume more of, to improve utility, without increasing total expenditure? What happens to the MU/P ratio for each good as he begins to adjust consumption? Why?

Utility is maximized only when MUx/Px=MUy/Py

He would consume more Y and less X so that MUx/Px would go up and MUy/Py would go down.

The price