A) Discuss a real-world example of a normal good that you ...



a) Discuss a real-world example of a normal good that you use and how your demand for this product/service varies with your income.  Also provide a real-world example of with a a product or service that has a negative cross-price elasticity of demand product or service produced by your workplace.  

A normal good for me is gasoline. I like to go on road trips on the weekend, but this can get expensive given the cost of gas. When my income goes up, however, I can more afford to go on trips, so my demand for gasoline rises. If I am having a “tight” month and my income is down, I will go on fewer trips, and my purchases of gas go down.

Keeping with the gas theme, I also used to work at a gas station. Since gas and cars/trucks/SUVs are complimentary goods, when the price of gas went up, demand for cars (particularly gas guzzling SUVs and trucks) would go down. That is, gasoline and cars have a negative cross price elasticity.

b) Discuss the utility you would derive from a good/service you use over a fixed time period, such as daily, weekly, or monthly.  First, respond to the following bullets:

• How much utility you would derive from consuming the first unit of a good/service of your choice (choose a good/service you use)?  Answer this question by:

1. Stating what good/service you selected.

2. Specifying the time period of consumption.

3. Assigning a numerical value to the utility you would derive from consuming the first unit of the good/service over the specified time period (100 would be a good value to start with).

I selected apples during a week. I would derive 100 in utility for the first apple.

• How much utility you would derive from consuming a second unit of the good/service you selected?  Again, assign a numerical value to the utility you would derive from consuming a second unit; this is your marginal utility from consuming a second unit of the good/service.  If you only consume one unit of the good or service, then discuss how much utility you would derive if you consumed a second unit of the good/service.

I would derive 95 utility from the second apple in one week. I really like apples, and would derive 100 in utility from my first apple of the week, but the second does not give me quite as much utility as the first.

• At what point (what unit of consumption . . . the third unit? . . . the fourth unit? . . . etc.) would your marginal utility become negative from consuming another unit of the good/service.  Also, assign a negative numerical value to your marginal utility of consuming this unit.  Why would your utility become negative at this particular unit?

At about 15 apples in one week I would derive negative utility. This is more than 2 per day, and I do not enjoy apples THAT much. I would derive -10 utility from the 15th apple in a single week. My utility would become negative at this point because I will be very tired of eating apples, and would prefer something different at this point.

Second, complete the un-shaded boxes in the following table:   

|Units of good/service consumed |Total |Marginal Utility |Price (in $) you would be willing to pay for this |

| |Utility | |unit of the good/service |

|Zero (no units) |-0- |-------- |----------------- |

|First Unit | 100 |100  |$4  |

|Second Unit | 195 |95  |$3.50  |

|Unit where marginal utility becomes |795  | -10 | $0 |

|negative. (Student – Please fill in this| | | |

|box.) | | | |

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