Consider a rational, utility-maximizing consumer who is choosing between two goods:  clothing (C) and food (F).  The utilities of the two goods are independent, so total utility (U) = Uc+Uf.

Utility-Maximization

Consider a rational, utility-maximizing consumer who is choosing between two goods:  clothing (C) and food (F).  The utilities of the two goods are independent, so total utility (U) = Uc+Uf. The following chart shows the utility from each good:

 

Quantity consumed of Food (F) 0  1  2  3  4  5
Utility from F 0 12 20 24 26 27

 

Quantity of clothing (C) 0  1  2  3   4   5
Total Utility from C 0 40 70 90 100 100

 

The price of clothing is $5 per unit and the price of food is $1 per unit.

 

Explain how this consumer would allocate an income of $18 on the two goods.

 

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  1. Supply and Demand

Consider the market for silver, where quantity is in ounces, and price in dollars.

 

Price   (P) $27 $24 $21 $18 $15 $12 $6 $3 $0
Quantity   Demanded (QD)   0   2   4   6  8 10 12 14 16
Quantity   Supplied (QS) 16 14 12 10  8  6  4  2  0

 

  1. a) What are the equilibrium price and quantity? Why?
  2. b) Assume that the Government puts in place a price ceiling (maximum) of $6 per ounce. What will be the new Qs, the new Qd, the actual amount bought/sold, and the shortage/surplus (if any)? Why?
  3. c) Assume that the government imposes a price floor (minimum) of $ 21 per ounce in this market. What will be the new Qs, the new Qd, the actual amount bought/sold, and the shortage/surplus (if any)? Why?
  4. d) Calculate the total revenue received by the seller from actual trade (defined as actual price multiplied by actual quantity) in this market in the original equilibrium, and under the price controls described in parts b and c above.
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