1. Product Y A B C D I2 I1 E F
Product X

2. Problem 1:
Slide #1 figure: A consumer is initially in equilibrium at point C.
The consumer’s income is $300, and the budget line through point C is given by
$300 = $50X + $100Y. When the consumer is given a $50 gift certificate that is good
only at store X, she moves to a new equilibrium at point D.
Determine the prices of goods X and Y.
How many units of product Y could be purchased at point A?
How many units of product Y could be purchased at point E?
How many units of product Y could be purchased at point B?
How many units of product Y could be purchased at point F?
Based on this consumer’s preferences, rank bundles A, B, C, and D
in order from most preferred to least preferred.
g. Is product X a normal or an inferior good?

3. Problem 2:
A common marketing tactic among many liquor stores is to offer their clientele quantity (or volume)
discounts For instance, a second-leading brand of wine exported from Chile sells in the US for $8 per bottle
if the consumer purchases up to eight bottles. The price of each additional bottle is only $4. If a consumer
has $100 to divide between purchasing this brand of wine and other goods, graphically illustrate how this
marketing tactic affects the consumer’s budget set if the price of other goods is $1. Will a consumer
ever purchase exactly eight bottles of wine?
Explain.

4. Problem 3:
An economist estimated that the cost function of a single-product firm is:
C(Q) = Q + 30Q2 + 5Q3
Based on this information, determine:
The fixed cost of producing 10 units of output.
The variable cost of producing 10 units of output.
The total cost of producing 10 units of output.
The average fixed cost of producing 10 units of output.
The average variable cost of producing 10 units of output.
The average total cost of producing 10 units of output.
The marginal cost of producing 10 units of output.

5. Problem 4:
You are a manager for Herman Miller – a major manufacturer of office furniture.
You recently hired an economist to work with engineering and operations experts
to estimate the production function for a particular line of office chairs. The report
from these experts indicates that the relevant production function is
Q = 2(K)1/2(L)1/2
where K represents capital equipment and L is labor. Your company has already
spent a total of $10,000 on the 4 units of capital equipment it owns. Due to current
economic conditions, the company does not have the flexibility needed to acquire
additional equipment. If workers at the firm are paid a competitive wage of $100 and
chairs can be sold for $200 each, what is your profit-maximizing level of output and
labor usage? What is your maximum profit?