1. Consider the market for Netflix Subscriptions. Show graphically and explain using economic intuition, what happens to the market price and quantity in each of the following:

a) A popular show “Suits” gets taken out of the platform.

b) The price of Hulu subscriptions doubles.

c) After the effects of a) and b), you see that the price of Netflix subscriptions increases.

d) After the effects of a), what will happen if Netflix doesn’t lower their prices.

For each of the following situations, decide whether Shane has diminishing marginal utility. Explain.

a) The more economics classes Shane takes, the more he enjoys the subject. And the more classes he takes, the easier each one gets, making him enjoy each additional class even more than the one before.

b) Shane likes loud music. In fact, according to him, “the louder, the better.” Each time he turns the volume up a notch, he adds 10 utils to his total utility.

c) Shane enjoys watching the show “Stranger Things”. He claims that these episodes are always exciting, but he does admit that the more times he sees an episode, the less exciting it gets.

d) Shane loves sour patch kids. The more he eats, however, the fuller he gets and the less he enjoys each additional unit. And there is a point at which he becomes satiated: beyond that point, more marshmallows actually make him feel worse rather than better.

3. Bruno can spend his income on two different goods: smoothies and energy bars. For each of the following three situations, decide if the given consumption bundle is within Bruno’s consumption possibilities. Then decide if it lies on the budget line or not.

a) Smoothies cost $2 each, and energy bars cost $3 each. Bruno has income of $60. He is considering a consumption bundle containing 15 smoothies and 10 energy bars.
b) Smoothies cost $2 each, and energy bars cost $5 each. Bruno has income of $110. He is considering a consumption bundle containing 20 smoothies and 10 energy bars.

c) Smoothies cost $3 each, and energy bars cost $10 each. Bruno has income of $50. He is considering a consumption bundle containing 10 smoothies and 3 energy bars.

4. In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why?

a) Ed spends a large portion of his income on his children’s education. Because tuition fees rise, one of his children has to withdraw from college.
b) Homer spends much of his monthly income on home mortgage payments. The interest on his adjustable-rate mortgage falls, lowering his mortgage payments, and Homer decides to move to a larger house.

c) Pam thinks that Spam is an inferior good. Yet as the price of Spam rises, she decides to buy less of it.

5. Many colleges and universities are witnessing a shift in demographics due to women having fewer children today. The birth rate fell from an average of 2.1 births per woman in 2007 to 1.7 births in 2018. The declining birth rate will reduce the college age population by as much as 15% between

2025 and 2029. How will the declining birth rate affect university operations? Answer the questions below.

a) Do higher-education institutions have large or small fixed costs? What are the variable costs for colleges and universities?
b) Given your answer in part a, how would you describe short-run average total cost?

c) If universities are operating where short-run average total costs are minimized, what will happen to the average cost per student of higher education if universities experience a decline in enrollments?

Question

1. Consider the market for Netflix Subscriptions. Show graphically and explain using economic intuition, what happens to the market price and quantity in each of the following:

a) A popular show “Suits” gets taken out of the platform.
b) The price of Hulu subscriptions doubles.
c) After the effects of a) and b), you see that the price of Netflix subscriptions increases.
d) After the effects of a), what will happen if Netflix doesn’t lower their prices.

For each of the following situations, decide whether Shane has diminishing marginal utility. Explain.

a) The more economics classes Shane takes, the more he enjoys the subject. And the more classes he takes, the easier each one gets, making him enjoy each additional class even more than the one before.

b) Shane likes loud music. In fact, according to him, “the louder, the better.” Each time he turns the volume up a notch, he adds 10 utils to his total utility.

c) Shane enjoys watching the show “Stranger Things”. He claims that these episodes are always exciting, but he does admit that the more times he sees an episode, the less exciting it gets.

d) Shane loves sour patch kids. The more he eats, however, the fuller he gets and the less he enjoys each additional unit. And there is a point at which he becomes satiated: beyond that point, more marshmallows actually make him feel worse rather than better.

3. Bruno can spend his income on two different goods: smoothies and energy bars. For each of the following three situations, decide if the given consumption bundle is within Bruno’s consumption possibilities. Then decide if it lies on the budget line or not.

a) Smoothies cost $2 each, and energy bars cost $3 each. Bruno has income of $60. He is considering a consumption bundle containing 15 smoothies and 10 energy bars.
b) Smoothies cost $2 each, and energy bars cost $5 each. Bruno has income of $110. He is considering a consumption bundle containing 20 smoothies and 10 energy bars.

c) Smoothies cost $3 each, and energy bars cost $10 each. Bruno has income of $50. He is considering a consumption bundle containing 10 smoothies and 3 energy bars.

4. In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why?

a) Ed spends a large portion of his income on his children’s education. Because tuition fees rise, one of his children has to withdraw from college.
b) Homer spends much of his monthly income on home mortgage payments. The interest on his adjustable-rate mortgage falls, lowering his mortgage payments, and Homer decides to move to a larger house.

c) Pam thinks that Spam is an inferior good. Yet as the price of Spam rises, she decides to buy less of it.

5. Many colleges and universities are witnessing a shift in demographics due to women having fewer children today. The birth rate fell from an average of 2.1 births per woman in 2007 to 1.7 births in 2018. The declining birth rate will reduce the college age population by as much as 15% between

2025 and 2029. How will the declining birth rate affect university operations? Answer the questions below.

a) Do higher-education institutions have large or small fixed costs? What are the variable costs for colleges and universities?
b) Given your answer in part a, how would you describe short-run average total cost?

c) If universities are operating where short-run average total costs are minimized, what will happen to the average cost per student of higher education if universities experience a decline in enrollments?

Accepted Answer

Market Equilibrium Price is the price at which the quantity demanded by consumers equals the…