Question

PROBLEM SET 2 Due Date: Sunday September 13 1. You have an income of $50 to spend on two commodities. Commodity 1 costs $10 per unit, and commodity 2 costs $5 per unit. (a) Write down your budget equation. (b) If you spend all your income on commodity 1, how much could you buy? (c) What if you spend all your income on commodity 2? (d) Suppose that the price of commodity 1 falls to $5 while everything else stays the same. Write your new budget equation. (e) Suppose that your income drop to $30, while the prices of both commodities remain at $5. Write your new budget equation. (f) Draw those 3 budget lines (from (a), (d) and (e)) on the graph with commodity 1 on x-axis and commodity 2 on y-axis. commodity 2 12 11 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12commodity 1 2. Jonathan Livingstone is a prosperous lawyer. He consumes three goods, Whiskey (W), Tennis Shoes (TS), and meals in Gourmet Restaurants (GR). The price of whiskey is $20 per bottle, the price of tennis shoes is $70 per pair, and the price of a meal in the gourmet restaurant is $50. After he has paid his taxes and alimony, Jonathan has $500 a week to spend. (a) Write the budget constraint equation. (b) Suppose that he determines that he will buy one pair of tennis shoes per week. What equation must be satisfied by the combination of restaurants meals and whiskey that he could afford?

Answer 1

The budget equation formula used in the answer below is:
m= P1*X+P2*Y
Here, m is the income which consumer wants spend all on the combination of products,
P1 is price of good X and P2 is Price of Good Y.
Answers.
Q1.

all. a) Budget Equation 50 = lox commodity I + 5x Commshidy 2 b) If you spend all income. Commodity I then- Unit purchased of commodity 1 = 50 8 I will buy Sunits of commodity I and o units of commodity 2 = Sunits c) If you spend call income on Commodity 2 thent Units purchases of commodity 2 = 50 = lo units : I will by o units of commodity, and lounits of commodity? 5 d) Budget Equation 50 = 5x commodity ) + 5x commodity 2 e) Budget Equation 30 = 5x commodity + 5x commodity 2

Q1. (f)

Daiz Page No. Commodit 72 1 e 9 8 6 S y 4 d) 3 @) + 1 1 2 3 4 5 6 7 8 9 10 11 12 Commodity

Q2.

Q2. a) Budget constraint equation - 500 = 20W + TOTS t. 50 GR b) we will substitute the value TS=1 in above equation 500=20W + Goxl) + 50 GR 430=20W + 50 GR is - & New combination of meals and Whisky 2oWt50 GR=430

Thank You.