Question

Question 1: Louis the retired Canadian lives on a fixed budget and consumes only two goods: toques (T) and maple syrup (M). Suppose Louis monthly budget is 100 and the price of the two goods are (PT,PM) (4,2). (a) Make a properly labeled diagram illustrating Louis'budget constraint with T on the hori- zontal axis and M on the vertical axis. Indicate the area corresponding to the set of bundles (M, T) that Louis can afford. (b) What is the maximum T that Louis can afford? What about the maximum M? (c) What is the slope of the budget line, and what is the economic interpretation of it? (d) Suppose the Canadian government decides to ration maple syrup, limiting each person to mum of 40 units of maple syrup per month Draw a new diagram showing Louis a maxi new budget constraint and indicate the area corresponding to the set of bundles that Louis can afford now Question 2: Annie and Marty are both single parents with full-time jobs. Consequently, both value child care services (S) and children's clothing (C) but may have different preferences for the two goods. The government decides it wants to make life easier for single parents and is considering providing single parents with monthly child care vouchers or, simply, providing single parents with a cash payment every month. Suppose Annie and Marty's incomes are both 400, the price per unit of child care is 10 per unit and the price per unit of clothing is 20. (a) Draw Annie's budget constraint assuming the government decides to offer a $100 voucher (b) Draw Marty's budget constraint assuming the govenment decides to offer a $100 cash (c) Draw an indifference curve representing Annie's preferences that is consistent with Annie (d) Draw an indifference curve representing Marty's preferences that is consistent with Marty for child care. payment to single parents. strictly preferring the cash payment to the voucher. being indifferent between the cash payment and the voucher. Question 3: After winning the lottery, Australian Artie decides to retire, stay home, and watch sports on television all day. Artie likes both Rugby, R, and Aussie Rules Football, F and views them as imperfect substitutes. In particular, Artie's preferences can be represented by the follow- ing utility function: U- RF6. Since Artie is rich, the only cost of watching F is the opportunity cost of not watching R: one hour of R necessarily means one hour less of F. In other words, evern though Artie is rich, there is still a price on his time 1-2 of 2

Answer 1

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P_M = 2, P_T = 4, income y = 100. a) B middot C rightarrow T P_T + M P_M = y, 100 = 4T + 2M b) Now max T = y/P_T = 100/4 = 25 Max M = y/P_M = 100/2 = 50 c) slope of B middot C = P_T/P_M = 2, meaning, it is the ratio of prices of two goods. D) now rationing d) Max M� = 40, so when M� = 40, money left = 100 - P_M middot M� = 100 - 40 times 2 = 20 so when M� = 40, T = 20/4 = 5 new B middot C has kink at (5, 40)