## l. Paige consumes only two goods Starbucks S and Lululemon L.

Question 1:

l. Paige consumes only two goods Starbucks S and Lululemon L. Her preferences correspond

to the utility function ms. 1.) – 8°3L° ‘. with marginal utility functions, MUs – 0.28’° ‘L°

and MUL – 0.8S° 2L“. (IS Points)

a ll“ Paige has $600 to spend on Starbucks and Lululemon what is het optimal

consumption bundle when S = $2 and L – $100?

(a) If Paige has $600 to spend on Starbucks and Lululemon what is her optimal consumption bundle when S=$2 and L=$100?

(b) If the price of Starbucks doubles from $2 to $4 what is Paige’s new optimal consumption bundle?

(c) Calculate the substitution and income effect for Starbucks.

(d) Based on your answer in part c, what type of good is Starbucks?

Question 2:

2. Scott has a boat-building firm. It uses labour L. and capital K to build boats. “5 Pl’OdW‘k”l

function is o – 1019505 with M = 5 Run.“ and MP1: = 5 L°”/K°”- “5 Pom)

a. The cost of labour is w = SIOO and the cost of capital is r = $50, if capital if fixed at

K = 9 what is the short-run cost function?

(a) The cost of labour is w=$100 and the cost of capital is r=$50, if capital if fixed at k=9 what is the short-run cost function?

(b) Plot and label the short -run average variable cost (AVC), average fixed cost (AFC), and average cost (AC) functions.

(c) If Scott vary the amount of capital used by the firm, what is the long-run cost function?

(d) Plot and label the long-run average cost (AClr) and short-run average cost (ACsr) functions.

Question 3:

3._ Suppose the market demand function for ice cceam is Q‘ = 10 – 2P and the market supply

function for ice cream is Q’ = 4? – 2. both measured in millions of gallons of ice cream per

yes. (15 Points)

a What is the equilibrium ptice and quantity?

(a) What is the equilibrium price and quantity?

(b) Calculate aggregate surplus

(c) Suppose the government imposes a $0.50 subsidy on each gallon of ice cream. What is the new equilibrium price and quantity?

(d) How much does aggregate surplus changes as a result of the subsidy?

(e) How much does the ice cream subsidy cost the government?