Question

Question 1

In a two good model, if the two goods are perfect complements, they must both be normal goods. Explain.

Question 2

If, at your current consumption levels, your marginal utility for baseball tickets is higher than your marginal utility for football tickets, then you should go to more baseball games and less football games. True or false? Explain.

Answer 1

Solutions -

In a two good model, if the two goods are perfect complements, they must both be normal goods.

Answer: — since the goods are always consumed as pairs, consumption of both increases as income increases

Question 2

Answer -

• UNCERTAIN: Unless I know the price of football tickets and baseball tickets, I do not know whether I should be consuming more of either. Note that the bundle of tickets that I should consume is determined by the equation:

MUbaseball / MUfootball = pbaseball / pfootball

• Saying that the left-hand side of this equation is greater than 1 does not imply that the equation is not satisfied. The ratio of the prices could be greater than one and the equation could be satisfied. Thus, it is not clear that I should buy more baseball tickets just because my marginal utility for baseball tickets is higher than my marginal utility for football tickets

Consider, for example, if the question had asked whether you should consume more cars and less candy bars. It is clear that if you had the choice, you would rather have an extra car for free than an extra candy bar for free. Thus, your marginal utility for a car is greater than your marginal utility for a candy bar. But, you should not necessarily consume more cars and less candy bars. Why? Because cars are more expensive. If you got a car, you would actually have to give up thousands of candy bars.