Question

Quick intuition check via True or False Questions 1. 2. If all prices double and income triples, then the budget line will become steeper There are two goods. You know how much of good 1 a consumer can afford if she spends all of her income on good 1. If you knew the ratio of the prices of the two goods, then you could draw the consumer's budget line without any more information. lf good l is on the horizontal axis and good 2 is on the vertical axis, then an increase in the price of good 1 will not change the horizontal intercept of the budget line The Marginal Rate of Transformation is constant along any budget constraint, always. A decrease in income pivots the budget line around the bundle initially consumed 3· 4. 5. Sharpen your pencils. Here we go. You can do this. 1) Noah likes hot dogs and Coca-Cola. Hot dogs cost $1 each and Cokes cost $.50 per bottle There is a special promotion for Coke that will last for one month. If Noah sends in the bottle tops from the Cokes he drinks during the next month, he will get a refund of $.20 for every bottlecap beyond the first 12 that he returns. For example, if he returns 25 bottle caps he will get back $2.60 $.20(25 12). Noah has $40 to spend on hot dogs and Coke during the next month. Draw his budget line with Coke on the horizontal axis and hot dogs on the vertical axis. Find the points where the budget line hits the axes and the point where it has a kink. At each of these three points write down the quantities of each good consumed 2) Max lives on Snickers Bars and Doritos. The price of Snickers (S) is 2 dollars per bar and the price of Doritos (D) is 1 dollar per bag. Max allows himself to spend no more than 10 dollars a day on food. He also restricts his consumption to 5,000 calories per day. There are 500 calories in a Snickers Bar and 1000 calories in bag of Doritos. Assume that Max spends his entire money budget each day and consumes no more calories than his limit. a) Draw Max's Budget constraint and calculate the MRT. Put Snickers on the Y-Axis b) Draw Max's caloric constraint. c) Identify the set of possible bundles that satisfy Max's budget and caloric constraint? d) What is the highest number of Snickers bars Max could feasibly consume? Would he have income left if he did that? Does he meet his caloric constraint? What is the largest number of bags of Doritos he could feasibly consume? Would he have income left after that? Does he meet his caloric constraint? e) f) What combination of Snickers and Doritos would he consume if wanted to spend all his money and consume 5,000 calories? 3) Lori is studying economics and political science. She can read 30 pages of political science per hour but only 5 pages of economics per hour. This week she has a 50-page assignment in economics and a 150-page assignment in political science. Because of her job, she cannot devote more than 10 hours to studying these subjects this week. She realizes she cannot complete all of her assignments but is determined to complete at least 30 pages of her economics reading. Draw a graph with pages of economics on the horizontal axis and pages of political science on the vertical axis. On this graph, show the possibilities that are consistent with the constraints that Lori has imposed on herself. (She is allowed to read ahead in either subject.) Label key points on your graph with their numerical values.

Answer 1

1. False. Slope of the budget line does not depend on income but relative price. As prices of both commodities are doubled, relative price remains same. so budget line will neither steeper nor flatter, only the intercept changes as income has increased more than proportionately to prices. so budget line will shift to rightward without making it steeper.

2. False. Price of X has to be known.

3. False. If price of good 1 increases the horizontal intercept will decrease as it is given by income/price of good 1.

4. False. It is constant only for straight line budget constraint and it is not true for non linear curves.

5. False. A decrease in income will shift the budget line leftward. As the relative price is not changing its slope wont change.