ECON1040 Principles of Economics_Tutorial 1_S1 2022
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ECON1040 Principles of Economics_Tutorial 1_S1 2022
Tutorial 1, Week 2.
1. Preferences and MRS (sec. 3.2)
Paula is studying Econ1506 – Everything you need to know about economics but are afraid to ask, at the University of Sydney. Paula enjoys surfing (or free time) but also wants to get a high grade. When asked, Paula lists the following combinations of hours of free time and final grades that would make her equally happy.
A B C D E F
Hours offree time
Grades
MRS
10
92
11
82
12
74
13
67
14
61
15
56
What does it mean to say that Paula is equally happy at A, B, C …F?
Define and identify the marginal rate of substitution (MRS).
Draw the indifference curve for Paula with hours of free time on the horizontal axis and grade on the vertical axis.
2. Indifference Curves
Paula is asked for another set of combinations of free time and grades that make her equally happy and she lists the following:
|
G |
H |
I |
J |
K |
L |
|
|
Hours offree time |
12 |
13 |
14 |
15 |
16 |
17 |
|
Grades |
92 |
82 |
74 |
67 |
61 |
56 |
Describe why Paula would prefer I to C. Now add the points in the table above to your original diagram and draw in the new indifference curve.
What could we say about an outcome (which we will call M) where Paula received a mark of 84 and only studied for 10 hours?
3. The Feasible Set (sec. 3.4)
Consider the choices actually available to Paula. Suppose that the set of free time and marks Paula can achieve is given by the following.
|
Free time |
10 |
11 |
12 |
13 |
14 |
15 |
16 |
17 |
|
Grades |
90 |
90 |
89 |
85 |
80 |
73 |
64 |
53 |
|
MRT |
|
|
|
|
|
|
|
|
Draw Paula’s feasible set.
Starting at 15 hours of free time what is the opportunity cost of one hour of free time?
Starting at 16 hours of free time what is the rate at which Paula can transform free time into marks, i.e. what is her MRT? Fill in the remainder of the table.
4. Paula’s Choice (sec. 3.5)
Suppose that Paula chooses to study for 12 hours per day (and therefore has 12 hours of free time), is this an optimal choice? Why or why not?
Suppose that Paula chooses to study for 8 hours per day (and therefore has 16 hours of free time), is this an optimal choice? Why or why not?
Problems such as these are often referred to as constrained optimisation. Why? What is true about the slope of the production function and the indifference curve at the optimum? Give an interpretation of this.
5. Preferences and indifference curves (sec. 3.2)
In the textbook it is stated that indifference curves never cross. Let’s consider why that is the case. Consider the diagram below two ICs are drawn to represent the preferences of Reginald over sushi and hamburgers.
Sushi
D
B
A
C
IC0
IC1
Hamburgers
Given A and B both lie on IC0, what can we say about how much utility or satisfaction Reginald gets from both of these outcomes?
Given C and D both lie on IC1, what can we say about how much utility or satisfaction Reginald gets from both of these outcomes?
Comparing A and C, which of these outcomes do you think gives Reginald greater utility or satisfaction?
Comparing B and D, which of these outcomes do you think gives Reginald greater utility or satisfaction?
What does this say about the possibility that ICs cross?
6. Optimisation Problems - income and substitution effects (sec. 3. 7)
Let’s suppose that Francis has $100 in her wallet. Assume that there are only two items available for purchase– smartphone apps and streaming subscriptions. Apps cost $10 each and a subscription costs $5. Using a set of axes with quantity of apps on the vertical and subscriptions on the horizontal, draw Francis’s feasible set. To do so, ask yourself how many apps can Francis purchase if she spends all her money on apps? How many streaming services if she spends all her money on streaming services? What if she spends half her money on apps and half her money on streaming services?
Draw some indifference curves and identify Francis’s optimal choice.
Now consider how Francis’s optimal choice might change by using the concept of income and substitution effects. What might happen to Francis’s purchases of apps in the following situations:
• Francis’s friend finds $100 and decides to share it with her ($10 each).
• The price of apps decreases to $5 because a new competitor enters the market, driving down the price of apps for consumers.
Key Terms
Note that at the end of each tutorial I will identify key terms or concepts that you should be familiar with and that are examinable:
• Constrained choice problem driven by scarcity
• Opportunity cost
• Average product
• Marginal product
• Indifference curve
• Feasible set
• Marginal rate of substitution (MRS)
• Marginal rate of transformation (MRT)
• Optimum
• Income effects & Substitution effects
2022-05-27