| Assessment Task: | Short Answer Questions |
| Submission Date and Time: | 5th April 2022; 23:59PM (NSW time) |
| Value (Weight): | 20% of total assessment |
| Word Length: | 1500 words |
Assignment 1 Questions:
(1) (All Students – 18 Marks). The following table presents Jane’s marginal utility from consuming hotdogs (H) and cola drinks (C). She has only $30 and must spend it all consuming both goods.
| Quantity (H) | MUh (utils) | Quantity (C) | MUc (utils) |
| 1 2 3 4 5 6 7 8 | 20 18 16 14 12 10 8 6 | 1 2 3 4 5 6 7 8 | 14 12 10 8 6 4 2 -2 |
(a) What is the total utility that Jane will receive if she consumes 6 cola drinks (C) and no hotdogs (H)?
(b) Write the two conditions that need to be satisfied to maximise Jane’s utility.
(c) Which combination of hotdogs (H) and cola drinks (C) Jane must choose to maximise her utility under the two conditions in (b) if the price of hotdogs is $4.00 and the price of cola drinks is $2. Explain your answer.
(2) (All Students – 18 Marks). Suppose the Spanish Government subsidises housing expenditures of low-income families by providing a three dollar-for-dollar subsidy to a family’s housing expenditure. The Sanchez family qualify for this subsidy and spend a total of $1,000 per month on housing (they spend $250 of their own and receive a government subsidy of $750). Recently, a new policy has been proposed that would provide each low-income family with a lump sum transfer of $750, which can be used for housing or other goods. Using a graph, demonstrate whether the Sanchez family would prefer the current program, the proposed program or would be indifferent between the two. Explain your results.
(3) (All Students – 18 Marks). Suppose the demand for mangoes (Qdm) is given as follow:
Qdm = 70-4Pm
(a) What is the point price elasticity of demand if the price of mangoes is $5?
(b) Suppose that the price of mangoes increases slightly from $5, what will happen to the number of mangoes sold and the total expenditure by consumers on mangoes?
(4) (All Students – 18 Marks). Sophie’s utility depends upon her income. Her utility function is U= I1/2. She received a prize that depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she will receive $625. Otherwise, she will receive $225.
(a) What is the expected payoff from this prize? (Note that the probability of rolling a 3 is 1/18, the probability of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36, and the probability of rolling an 8 is 5/36).
(b) What is the expected utility from this prize?
(c) Sophie is offered an alternative prize of $324 with no dice roll required. Will she accept the alternate prize or roll the dice?
(d) What is the minimum payment that Sophie will accept to forego the roll of the dice?
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NB; It is expected that your report will include a title page, a brief introduction that indicates this is the first assignment of the unit and the topics covered in the assignment, then the questions of the assignment and the list of references at the end.
In the body of the assignment you need to include your citations (e.g.: Pindyck and Rubinfeld, 2017) and you need to cite the sources of the graphs. You are doing the graphs based on other people ideas, so I recommend you to include something like:
Figure 1. [Title of the Figure]
Source: Adapted from _________(e.g.: Pindyck and Rubinfeld (2017)).
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