Question

Your name: Student ID: ECON 220: PROBLEM SET 2 Due Date: Monday, February 17th, 2020 Part 1: Multiple choice questions (Although it's not required, make sure you can explain your answer). 1 point each. 1. An increase in an individual's income without changing relative prices will a. rotate the budget constraint about the X-axis. b. shift the indifference curves outward. c. shift the budget constraint outward in a parallel way. d. rotate the budget constraint about the Y axis. 2. If the price of X falls, the budget constraint a. shifts outward in a parallel fashion. b. shifts inward in a parallel fashion. c. rotates outward about the X-intercept. d. rotates outward about the Y-intercept. 3. Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student's beverage budget is $20 per week. What is the most cups of tea the student could buy? a. 20 b. 16 c. 10 d. 8 4. If an individual has a constant MRS of shoes for sneakers of 3/4 (that is, he or she is always willing to give up 3 pairs of sneakers to get 4 pairs of shoes) then, if sneakers and shoes are equally costly, he or sh will: a. buy only sneakers. b. buy only shoes. c. spend his or her income equally on sneakers and shoes. d. wear sneakers only 3/4 of the time.

Answer 1

Question 1

Answer—Shift the budget constraint outward in a parallel way

Here the slope of the budget constraints is the same if the price ratio does not change. Then increase in income moves the budget constraint moves up. It will shift the budget constraint outward in a parallel way.

Question 2

Answer---Rotates outward about the Y-intercept

Suppose the Y-intercept does not change and the X-intercept moves to the right then the budget constraint moves outward about the Y-intercept.

Question 3

Answer---16

Here the budget constraint is,

20 = 2.50 +1.25T

T = = 16

Question 4

Answer—Buy only sneakers

Here given, , It means that if he chooses between one pair of shoes and sneakers, then individual prefer sneakers. Because 3 pair of sneakers are as valuable as 4 pair of shoes. So it shows the expensiveness of sneakers. So he only buys sneakers.

MRS =