University of Nebraska at Omaha Economics Discussion

Question 1

Winnie the Pooh is only interested in two goods, honey (x-axis) and peanut-butter (y-axis).

1. (a) Use indifference curves and budget constraints to show a scenario where an increase in theprice of honey leads to an increase in Pooh’s consumption of peanut butter. Labeleverything.
2. (b) Does this imply that Pooh considers honey and peanut butter as complements or assubstitutes? Explain your answer.
3. (c) Does this imply that Pooh considers peanut butter as a normal good? Explain why or whynot.

Show your work.

Question 2

A scuba gear firm is currently producing 500 wetsuits. The increase in output per dollar spent on labor is 40 wetsuits, and the price per unit of capital is $10.

1. (a) What is the marginal product of capital if the firm is producing at a cost minimizing point?
2. (b) If the marginal product per dollar spent on capital is 50 wetsuits, then(a) Is the firm producing at a cost minimizing point?(b) If no, what would have to change?

Explain using a graph and other principles discussed in class. Show your work.