In Class Problems

Updated 09/27/01 07:54 AM

Problem 1.

China earns $1000 a month dealing poker at the Hustler casino. She lives with her boyfriend and he pays for rent and food when they eat at home. Her only monthly expenses are clothing and eating out. Eating out costs $20 and a new outfit costs $200.  

• Draw China’s budget line and indifference curves between clothing and eating out if she eats out every day of the month (assume there are 30 days in the month). Put eating out on the vertical axis and clothing on the horizontal axis.
• At the end of November, China gets on the scale and finds she has gained 10 lbs. (too much greasy Asian food). She looks in the mirror and is disgusted with how she looks.
• Depict on you graph how her budget lines and/or indifference curves would shift.
• •What has happened to the marginal rate of substitution at her current consumption bundle? Explain.
• •Using the marginal rate of substitution and the relative price explain and depict how looking in the mirror will affect China’s behavior.
• At the end of December, China gets on the scale again and finds she has lost 20 lbs. She looks in the mirror and can’t keep a smile off her face. She looks in her closet and decides that her clothing is way too conservative for such a fly girl.
• Depict on you graph how her budget lines and/or indifference curves would shift.
• What has happened to the marginal rate of substitution at her current consumption bundle? Explain.
• Using the marginal rate of substitution and the relative price explain and depict how looking in the mirror will affect China’s behavior.
• In January, she wins a $1000 jackpot while playing poker. In the same month, her sister graduates from FIDM (The Fashion and Design Merchandising School) and gets a job as an assistant designer in the Los Angeles fashion industry. This means she can get clothing at a 50% discount. 
• Depict the change if eating out is an inferior good.
• Label on your graph all income and substitution effects.
• Is it possible that China could get thinner, better looking, and more fashionable in January? Explain and depict.

Problem 2.

Suntaree is a dealer at the Hollywood Park Casino in Inglewood. Her two great joys in life are playing poker (Texas Hold Em) and wearing designer clothes. Working as a dealer she makes $10 per hour and works 40 hours a week for 4 weeks a month. A complete designer outfit, including shoes, costs $400. Unfortunately, she is a lousy card player and loses every time she plays.

• When Suntaree plays in a low stakes poker game she loses $10 an hour. Draw Suntaree's monthly budget line between designer outfits and hours playing poker and her indifference curves if you observe her playing 20 hours of poker a week. remember you are drawing her monthly budget line). Assume there are 4 weeks in each month.
• As a dealer Suntaree meets all the regular players most of whom are scrubs. One week she is approached by one of the regulars. He is old, ugly, has a nasty personality but has lots of cash. He offers to give Suntaree $50 in chips each day to play poker if she would date him. Draw her monthly budget line if you observe her dating the player and notice her wearing 4 new designer outfits in the next month. Assume there are 28 days in each month. Is poker a normal or inferior good? Show on your budget line and indifference curve graph. Assume that the chips can be redeemed for cash.
• The next month one of other regular players, who is younger, good looking, and has a pleasant personality, approaches Suntaree and asks why such a nice girl is dating such a loser. Suntaree answers, "I don't like him much, but I like wearing designer clothing and playing poker more." The good looking player thinks long and hard and then makes the following offer. If Suntaree dumps her boyfriend and dates him, he will take her to the mall once a month and she can buy as many designer outfits as she wants and he will pick up 87.5% of the cost, i.e. she pays $50 and he pays $350 of the cost of each outfit. Will Suntaree switch boyfriends? Explain using budget lines and indifference curves.
• –Show on your graph how much it would cost her original boyfriend to keep from getting dumped.

Problem 3.

John earns $60,000 a year and lives in Los Angeles. His girlfriend lives in New York. A round trip ticket from Los Angeles to New York costs $500. John usually flies to New York once a month to see his girlfriend.

• Draw budget lines and indifference curves to illustrate John's situation. (hint: do everything based on a year's consumption).
• Suppose a new low cost carrier begins service on the Los Angeles to New York route. The new carrier charges only $300 for a round trip ticket. Show how the low cost carrier affects John's budget line. Is it possible for the cheaper price of seeing his girlfriend to reduce the number of visits John makes? Illustrate this situation on you graph.
• Suppose the original airline institutes a frequent flier program. A round trip from New York to Los Angeles is 6000 miles. If John flies 24,000 miles he will get one free round trip ticket. If he flies 42,000 miles he will get 2 free tickets. For every 12,000 miles he flies above 42,000 miles he will get one additional ticket. Draw budget lines and indifference curves (if possible) showing John staying with the original airline. Draw budget lines and indifference curves showing John switching to the low cost airlines even after the frequent flier program is started.  

Problem 4.

Consider a person who earns $2000 a month and is considering whether to send their child to a public or a private school. Suppose the public school is a take it or leave it proposition. The state decides how much to spend per student and the parents have no control over curriculum, hiring and firing teachers, etc. At private schools, parents have more choice. By choosing among different private schools, they choose how much education their children receive. By choosing a more expensive school, they can buy their children more education.

• Draw the budget line(s) facing this person. Now draw two sets of indifference curves. One set showing an individual who chooses to send their child to a public school where the state spends $500 per student and another set for an individual who would send their child to a private school that costs $800. Assume the private school costs $800 per month and attending private school precludes attending public school.
• Read the article about donations to public schools. If parents can augment the money the state spends on the public schools how will this change the budget line you drew in part A? Draw the budget line if schools are free to accept voluntary contributions.
• Suppose two competing initiatives are put on the ballot. One provides for a voucher which can be used to send your child to public school or can be used to pay for up to $500 of private schooling. Any cost of private schooling over $500 must be paid by the individual. The second provides for 50% reimbursement of the cost of private schooling up to $1000, i.e. if you spend $800 on private schooling, the government will reimburse you for $400. The total reimbursement cannot exceed $500. Draw budget lines depicting the two initiatives.
• Who would vote for which initiative? Draw indifference curves showing a person who would prefer the voucher and indifference curves showing a person who prefers the 50% reimbursement up to $500.