05 Jun Question Answer all questions below. Make sure to sho
Question
Answer all questions below. Make sure to show all your work.
1. For this problem, assume that Joe has $80 to spend on books and movies each month, and that both goods must be purchased whole (no fractional units). Movies cost $5 each, while books cost $10 each. Joe’s preferences for movies and books are summarized by the following information:
MOVIES
BOOKS
Q
TU
MU
MU/P
Q
TU
MU
MU/P
1
100
1
180
2
190
2
260
3
240
3
320
4
280
4
360
5
300
5
380
6
310
6
390
7
314
7
396
What combination of movies and books maximizes Joe’s utility? Show your work.
2. Two goods are purchased such that the marginal utility derived from A is 440 utils, and from B is 870 utils; the price of B is $11 and the price of A is $5.50. For a given total dollar amount spent on these two items, has total utility (combined) been maximized? Why or why not?
3. Why cities exist.
Consider a region where the self-sufficient wage is constant at $5. Suppose the payoff from innovation in a city with population n (measured in thousands) is:
a. Suppose a group of 1 (thousand) workers form a city. Will other workers have an incentive to join the cluster?
b. Suppose a group of 9 (thousand) workers form a city. Will other workers have an incentive to join the cluster?
c. Compute the (stable) equilibrium size of the innovation city.
4. Number of Workers and Net Wages
Using Table 3– 2 as a starting point, suppose the gross wage is $34 and the unit training cost is $52. Complete the following table.
Number of Workers Skills Gap Training Cost Net Wage
4
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