Provide manual (hand and calculator) solutions to all problems and clearly show your steps, calculations, and justifications for your answers. You may write your answers with ink pens; typing your answers is not required.
1. The U.S. government spends over $74 billion on its Supplemental Nutrition Assistance Program (SNAP) to provide millions of Americans with the means to purchase food. Suppose in the absence of SNAP, the average consumer must allocate a monthly income of $825 between food and “all other goods” such that the following budget constraint holds: $825 = $16.15A + $25.85F, where A is the monthly quantities of “all other goods” purchased and F is the monthly quantity of food purchased.
a. With the monthly quantity of “all other goods” purchased as the dependent (or “y”) variable, derive the equation of the budget line from the given budget constraint in the absence of SNAP. Clearly show your steps and calculations in 2 decimal points. Provide economic interpretations of the coefficients (numeric values) in your derived budget line equation.
b. What is the economic condition for the average consumer equilibrium in consumption of food and “all other goods” in terms of the consumer personal and market rates of substitution between food and “all other goods.” Graphically illustrate and carefully explain why the stated consumer equilibrium in consumption is true.
c. Assume that the average consumer receives a monthly SNAP (food stamps) benefit of $650 in addition to his/her personal monthly budget allocation of $825. Graphically illustrate and explain how SNAP alters the average consumer’s equilibrium if food stamps can be illegally exchanged for cash, and assuming that food is an inferior good while “all other goods” are normal goods. Show your steps and calculations, and carefully explain.
2. (a) Explain or discuss three reasons the theory of consumer behavior is important to a business
manager, including an example of each reason.
(b) With the theory of consumer behavior, graphically illustrate and carefully explain why a cash gift generally is preferred to an in-kind gift of equal value.
(c) Can an in-kind gift be as good as a cash gift of equal value? Explain and graphically illustrate.
3. You are a manager of a small manufacturing plant in a rural area where highly skilled labor is in short supply, despite that your plant currently pays its workers $30/hour. To alleviate the problem of skilled labor shortage at your plant, your firm is considering instituting one of the following workers’ compensation plans:
Plan A: Workers earn $30/hour for the first 8-hour work shift per day and overtime pay of $45 for
each hour worked beyond the regular 8-hour work shift.
Plan B: A 50% increase in the regular hourly wage of $30/hour for every hour worked by employees.
Either plan will eliminate your plant’s problem, as production and profit levels are up.
(a) With the theory of worker’s income-leisure choice (i.e., the theory of consumer behavior application in the labor market), graphically illustrate and carefully explain the impact of each plan on employment and earnings per day at your plant, assuming that leisure is a normal good. Indicate which plan the workers’ union will support for implementation and explain the economic rationale for the choice of the workers’ union.
(b) As a resident plant manager, explain why you will not support the choice by the workers’ union.
4 (a) With the theory of consumer behavior, explain and graphically illustrate why the individual’s demand curve for a commodity is downward sloping, assuming the case of a normal commodity with a decrease in its unit price. In your explanation, carefully distinguish between the two economic factors behind the downward-sloping nature of the individual’s demand curve.
(b) How is the individual’s demand curve different from the market demand curve for a commodity?
Instructions: Provide manual (hand and calculator) solutions to all problems and
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