6.1
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6.2 Mrs.
Simpson buys loaves of bread and quarts of milk each week at prices of
$1 and 80 cents, respectively. At present she is buying these products
in amounts such that the marginal
utilities from the last units purchased of the two products are 80 and
70 utils, respectively. Is she buying the utility maximizing combination
of bread and milk? If not, how should she reallocate her expenditures
between the two goods? LO2
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6.3 How
can time be incorporated into the theory of consumer behavior? Explain
the following comment: “Want to make millions of dollars? Devise a
product that saves Americans lots of time.” LO2
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6.4 Explain: LO2a. Before economic growth, there were too fewgoods; after growth,.there is too little time.b. It is irrational for an individual to take the time to be completely rational in economic decision making.c. Telling your spouse where you would like to go out to eat for your birthday makes sense in terms of utility maximization.
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6.5 In
the last decade or so, there has been a dramatic expansion of small
retail convenience stores (such as 7-Eleven, Kwik Shop, and Circle K),
although their prices are generally much higher than prices in large
supermarkets. What explains the success of the convenience stores? LO2
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6.6 Many
apartment-complex owners are installing water meters for each apartment
and billing the occupants according to the amount of water they use.
This is in contrast to the former procedure of having a central
meter for the entire complex and dividing up the collective water
expense as part of the rent. Where individual meters have been
installed, water usage has declined 10 to 40 percent. Explain that drop,
referring to price and marginal utility. LO3
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6.7 Using
the utility-maximization rule as your point of reference, explain the
income and substitution effects of an increase in the price of product
B, with no change in the price of product A. LO4
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6.8 ADVANCED ANALYSIS
A “mathematically fair bet” is one in which the amount won will on
average equal the amount bet, for example, when a gambler bets, say,
$100 for a 10 percent chance to win $1000 ($100 = .10 × $1000). Assuming
diminishing marginal utility of dollars, explain why this is not
a fair bet in terms of utility. Why is it even a less fair bet when the
“house” takes a cut of each dollar bet? So is gambling irrational? LO4
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6.9 Suppose
that Ike is loss averse. In the morning, Ike’s stockbroker calls to
tell him that he has gained $1000 on his stock portfolio. In the
evening, his accountant calls to tell him that he owes an extra $1000 in
taxes. At the end of the day, does Ike feel emotionally neutral since
the dollar value of the gain in his stock portfolio exactly offsets the
amount of extra taxes he has to pay? Explain. LO5
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6.10 You
just accepted a campus job helping to raise money for your school’s
athletic program. You are told to draft fund raising letter. The bottom
of the letter asks recipients to write down a donation amount. If you
want to raise as much money as possible, would it be better if the text
of that section, mentioned diat your school is #3 in the nation in
sports or that you are better than 99% of other schools at sports?
Explain. LO5
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6.11 LASTWORD
What do you think of the ethics of using unconscious nudges to alter
people’s behavior? Before you answer, consider the following argument
made by economists Richard Thaler and Cass Sunstein, who favor the use
of nudges. They argue that in most situations, we couldn’t avoid nudging
even if we wanted to, because whatever policy we choose will contain
some set of unconscious nudges and incentives that will influence
people. Thus, they say, we might as well choose the wisest set of
nudges.
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