Q2.

Many amusement parks, for example, charge a fixed admission fee in addition to a
charge for each ride. Many telephone companies charge a fixed monthly fee in addition to
charges based on actual calls made. And some shopping clubs charge a fixed membership
fee for the right to buy items carried in their stores or catalogues. Two-part pricing scheme is
a pricing scheme that consists of a fixed fee and a marginal charge for each unit purchased.
Their effect is to transfer a portion of the consumer surplus from the buyer to the seller.

Q3. It depends on the importance of university education for families. If you see university
education as a necessity, the elasticity of tuition will be inelastic, while if it is not important
enough or you do not have enough abilities to afford the high tuition, the elasticity will be
elastic. Because you are sensitive with the price change.

Q4. One is that their income level decreases and they have less money to pay for alcohol
since alcohol is normal good. Another depends on how price increases, if the price of alcohol
doubled due to sale taxes. Long-term heavy drinkers might have less abilities to afford them.

Q5.

The most important reason is the increase in income. Assume that, 30 years ago, the budget
constraint was b and the optimal consumption was q0. Although the price of gas has
increased, so has income. The budget constraint (a) has become steeper, but it has also
shifted outward. Optimal consumption increases to q1, despite the increase in price.

Q6. Compensating variation measures the amount of money a consumer would need to
receive to be compensated (in utility terms) for an increase in the price of a good. The
compensating variation gives us thus a monetary measure of the welfare effect of the
increase in price. It is given by the vertical difference between the intercepts with the y-axis
of the original budget constraint before the price change and that of the (artificial) budget
constraint after the price increase that we draw to pin down the substitution effect of a price
change.

The equivalent variation of the price increase corresponds to the amount of money a
consumer is willing to pay to avoid an increase in the price of a good. It is given by the
vertical difference between the intercepts with the y-axis of the original budget constraint
before the price change and that of the budget constraint that has the same slope as the
original one but that is tangent to the indifference curve corresponding to the new
equilibrium consumption choice of the consumer after a price change.

Q7.

ou will be better off, and for most regular indifference curves, you will be better off. Assume
the consumer's original income was M. His original budget constraint is a; after the petrol
price increase, it is b; and after the money from his uncle it is c. At the very end, he can
afford the original bundle he bought. But his indifference curve at the original optimum is
below his new budget constraint. By decreasing his petrol consumption and increasing other
goods consumption, he can reach a higher indifference curve which is the dotted
indifference curve.

Q8.

The loss in consumer's surplus is 5, the area of the shaded area in the diagram

Area = ( 6 + 4 ) x 1 / 2 = 5
Q9.

The maximal membership fee corresponds to the consumer surplus you enjoy when the
daily price of a movie is 4. Given your demand line, at P= €4/movie, you rent Q=8
movies/year, which yields you a consumer surplus of (20-4)*(8-0)/2 = €64. So maximum you
will pay for membership is €64.

Q10. Since her demand for caviar is inelastic at all prices, the increase in the price of caviar
will cause her total spending on it to go up. The money left over for hot dogs will decrease.
Since their price stays the same, consumption of hot dogs will decrease.

Q11. The key to solving this problem graphically is to draw the initial and final budget
constraints as precisely as possible. These two budget lines and last year's optimal bundle
are shown in the diagram. A closer look at the tangency point for last year's bundle shows
that this year Jones can afford a bundle she prefers to last year's. Looking at it graphically,
we can see that even if Jones’ income had fallen somewhat (i.e. if the green budget line
shifted inwards), she would still be better off.

A shortcut to noting that she is at least no worse off is to note that at the new prices and
with an unchanged income of 1050, the old bundle of 30 units of Y and 20 units of X is still
affordable.

Q12. The local laptop store owner will be more likely to object since consumer demand will
likely be more elastic for computers (people may drive to another city to save 1% on a
laptop) than for groceries (people are unlikely to drive to another city to save 1% on
potatoes). Thus more of the tax burden will be borne by the laptop store owner than the
grocery store owner.

Q13. True
Q14. Because Joe's initial bundle (A in the diagram) was given to him, as opposed to having
been chosen by him, there is no presumption that it was optimal for the initial prices.
Indeed, it may be that the initial bundle turns out to be optimal for the new budget
constraint, as shown, in which case Joe is not better off as a result of the price change. So
uncertain.