Problem 1 (15 points; 5 points per part) Please define or explain the following terms. A complete answer will include a graph, equation, and/or example as part of each definition.
Problem 2 (10 points) Yao’s weekly demand for basketballs is given by Qd = 3 − P2 where P is the price of basketballs. At the current price, Yao’s demand for basketballs is unit elastic. What is the current price of a basketball, and how many basketballs is Yao buying at this price?
Problem 3 (20 points) Each day Akiko, who is in third grade, eats lunch at school.
She likes only Twinkies (t) and soda (s), and these provide her with utility of
U(t,s) = t3 · s − 3
Twinkies cost $0.15 each and soda costs $0.30 per cup at the school cafeteria. Akiko’s parents give her $1.20 each day for lunch.
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Problem 4 (20 points) Jacques gets utility from atoms and molecules. Last week, Jacques had a weekly income of $150, and the price of atoms was $12. Jacques consumed seven atoms and eleven molecules. This week, the price of a molecule is $10; Jacques’s income and the price of atoms are unchanged. Suppose Jacques consumes six molecules this week.
Problem 5 (10 points) After observing Olga’s consumption choices for two days in a row, Pavel, an economics student, tells here: “You must not be rational. Yesterday, when bananas were on sale for $1 and peaches were $5, you bought five bananas and one peach. Today, bananas are back to $2 and peaches are still $5, and you’re still buying five bananas!”
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