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1th-edition-nicholson-solutions-manual/
CHAPTER 2
Utility and Choice
A. Summary
Chapter 2 introduces many new concepts to the student and for that reason it
is one of the more difficult chapters in the text. The central concept of the
chapter is the indifference curve and its slope, the Marginal Rate of Substitu-
tion (MRS). The MRS formalizes the notion of trade-off and is (in principle)
measurable. For those reasons it is superior to a “marginal utility” introduc-
tion to consumer theory. The definition provided for the MRS in Chapter 2
needs to be approached carefully. Here the concept is defined as the Margin-
al Rate of Substitution of “X for Y” by which is meant X is being substituted
for Y. In graphic terms the individual is moving counter-clockwise along an
indifference curve and the MRS measures how much Y will be willingly
given up if one more X becomes available. The pedagogic convention of al-
ways using counter-clockwise movements along an indifference curve is
helpful because the MRS does indeed diminish for movements in that direc-
tion.
For some reason, students’ primary difficulty with the material in Chap-
ter 2 is in confusing the MRS (a slope concept) with the ratio of the amounts
of two goods. Unfortunately, that confusion is increased by some examples
based on the Cobb-Douglas utility function, which make it appear that the
two concepts are interchangeable. To avoid this confusion, some instructors
may wish to give further emphasis to the marginal utility definition of MRS,
which is presented in footnote 2 of the chapter. This might be followed by
greater use of the utility maximization principle (the “equi-marginal princi-
ple”) from footnote 5.
The soft drink-hamburger example that runs throughout Chapter 2 is in-
tended to provide an easy, mildly amusing introduction to the subject for
students. In general, the example seems to work well and is, we believe, def-
initely superior to introducing the concepts through general goods X and Y.
Note also that this chapter includes analyses of 4 specific kinds of goods
(useless goods, economic bads, perfect substitutes, and perfect comple-
ments). Examining the utility maximizing conditions in these cases (Figures
2-5 and 2-9) should help students to visualize what the conditions mean in
cases where the results should be obvious.
from one point to the next in this way reinforces the concept of the trade-off
and (on a more sophisticated level) demonstrates Samuelson’s integrability
problems. Once a single indifference curve has been traced out, a second can
be constructed to the northeast of the first by using the “more is better” as-
sumption and proceeding with an identical construction. Utility maximiza-
tion can be approached in the same way by starting at the Y-intercept on the
budget constraint and inquiring whether the individual would make various
trades along the constraint.
Discussions of Chapter 2 material might focus on real world illustrations
of both economic and non-economic choices that people make. To approach
these, students might be asked to theorize what budget constraint faces peo-
ple in unusual situations (e.g., what is the cost of shopping for bargains or
for wearing seat belts). The instructor can then ask whether there is evidence
that individuals respond to changes in the relative costs associated with such
activities (that is, do they search more for bargains in high priced items, or
are certain types of people less likely to wear seatbelts). Application 2.6
Loyalty Programs also offers a number of discussion possibilities that would
help to illustrate the actual shape of budget constraints.
$8.00
b. = 80 bananas can be bought.
$.10/banana
c. 10 apples cost:
10 apples × $.40/apple = $4.00, so there is $8.00 – $4.00 = $4.00 left to spend
on bananas which means
$4.00
= 40 bananas can be bought.
$.10/banana
d. One less apple frees $.40 to be spent on bananas, so
Chapter 2: Utility and Choice 3
$.40
= 4 more bananas can be bought.
$.10/banana
e. $8.00 = $.40 number of apples + $.10 number of bananas = .40A + .10B.
b. U = 20 = 10 . B so 400 = 10 . B,
40 = B.
c. U = 20 = 20 . B , so 400 = 20 . B, 20 = B.
d.
e. From the budget part d, an individual can buy 10 apples and 40 oranges.
f. One less apple: U = 9 44 = 396 < 400 =20
Illustrator: L. J. Bridgman
Language: English
BY AMY E. BLANCHARD
Illustrated by
L. J. BRIDGMAN
BOSTON
DANA ESTES & COMPANY
PUBLISHERS
Copyright, 1909
By Dana Estes & Company
"I seem to have made an impression," she said as her aunt came up.
"I didn't know strangers were such a rarity here that people stared at
them the way that man did at me. I wonder who he is and what made
him look so taken by surprise."
"Oh, I suppose he didn't know that any of the summer residents had
arrived," returned Miss Elliott, "and he wondered who you were and
where you came from. There aren't usually any summer visitors here
before the middle of June."
"I suppose that must have been it," returned Gwen, at the same time
feeling that it did not quite explain matters.
At the side door, by which it seemed they were expected to enter,
they met Ora. She turned away her head and hurried around to the
kitchen.
"What a pretty girl," said Gwen, looking after her. "Such a lovely
complexion. But, oh dear, why does she lace so painfully? Doesn't
she know wasp waists are all out of style? That they belong to the
early Victorian age and passed out with ringlets and high
foreheads?"
"She probably doesn't know," returned Miss Elliott. "I notice that
many of the girls up here still cling to the traditions of their
grandmothers in more than one direction. I have heard that one, at
least, died from the effects of tight lacing."
"Then they need a missionary as much as the heathen Chinee
does," observed Gwen as she entered the house.
She had gone out bareheaded but she tossed aside the golf-cape,
which was none too warm for out-door wear, and sat down by the
window. Miss Phenie, established in a comfortable rocking-chair,
was quite ready for a chat while she knitted a "sweaterette" as she
called it. Miss Phosie was in the kitchen getting supper, but Miss
Phenie felt that it was due to her position as elder sister to entertain
the guests rather than to give a hand to the evening's work. It was
always her attitude and one of which no one had ever heard Miss
Phosie complain. The most that she had ever done was to remark to
Almira Green: "It's very easy to be hospitable when you do the
entertaining and some one else does the work." But that was under
great provocation when the minister, the surveyor, the doctor and the
editor of The Zephyr had all arrived on the island in one day and all
had been entertained at Cap'n Ben's house because there seemed
nowhere else for them to go. On that occasion Miss Phenie, as
usual, had asserted her right to the position of hostess, and had left
Miss Phosie alone to wash the dishes as well as to get the dinner,
Ora having gone to Portland for the day.
"Well," said Almira Green to whom Miss Phosie's remark was made,
"there was Cap'n Ben to do the talking, and as they was all men I
don't see why Phenie was called upon to set with them all the time."
"I guess she thought she had to," Miss Phosie had returned with the
feeling that perhaps she had said too much.
To-day, however, there was not much reason for Miss Phenie's
presence in the kitchen, for, while Miss Phosie made the soda
biscuits Ora could be setting the table. The lobsters had been boiled
that morning, so there were only the fish and potatoes to fry, and the
preserves to be set on the table with the cake. Miss Phenie, in tight
fitting black alpaca, rocked comfortably and asked questions till
Gwen, by the window, saw Luther Williams pass. "Who is that, Miss
Phenie?" she asked. "That tall man with the serious face and the
kind eyes?"
"I guess you mean Mr. Williams. I presume he is taking his after
supper smoke. He boards with us, you know."
"Oh!" Gwen wondered why he had not appeared at the table. "Is he
a relative of yours?"
"None in the world, and we never heard that he had any. He gets a
daily paper and advertising letters sometimes, but I never knew him
to get any other mail. He's real well educated, and reads everything
he can lay his hands on, but he is a very quiet man. He never talks
much to anybody, but there ain't a kinder man living. If anybody's in
trouble he's the first on hand, and the first to put his hand in his
pocket."
"Is he a fisherman?"
"Yes. His pound is just off your point. He's been real lucky and it's
said he's right well off."
"Has he boarded with you long?"
"Ever since he came to the island; that's about twenty years now. He
came for a week's fishing, he said, and he's stayed ever since. I
never heard a word against Mr. Williams. Everybody likes him, and if
he is rather close-mouthed you don't hear him speak ill of anyone.