Question 1. In the below figure, a consumer is initially

02 Jun Question 1. In the below figure, a consumer is initially

Question
1. In the below figure, a consumer is initially in equilibrium at point C. The consumer’s income is $300, and the budget line through point C is given by $300 = $100X + $150Y. When the consumer is given a $200 gift certificate that is good only at store X, she moves to a new equilibrium at point D.

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Product Y

Product X

A

B

C

D

E

F

I

2

I

1

a. Determine the prices of goods X and Y.

Price of X: $

Price of Y: $

b. How many units of product Y could be purchased at point A?

c. How many units of product X could be purchased at point E?

d. How many units of product X could be purchased at point B?

e. How many units of product X could be purchased at point F?

f. Based on this consumer’s preferences, rank bundles A, B, C, and D in order from most preferred to least preferred.

(Click to select)A, B, C, DD, B, C, AD, C, A, BC, A, B, D

g. Is product X a normal or an inferior good?

(Click to select)NormalInferior

2.A consumer’s budget set for two goods (X and Y) is 1,000 ? 5X + 10Y.

a. The budget set is illustrated below. What are the values of A and B?

Good Y

Good X

A

B

A =

B =

b. Does the budget set change if the prices of both goods double and the consumer’s income also doubles?

Yes, it shifts in toward the origin.

Yes, it rotates clockwise.

Yes, it shifts out from the origin.

No, it does not change.

c. Given the equation for the budget set, what are the prices of the two goods?

Good X: $

Good Y: $

What is the consumer’s income?

3. A worker views leisure and income as “goods” and has an opportunity to work at an hourly wage of $10 per hour.

a. The worker’s opportunity set in a given 24-hour period is illustrated below. What are the values of A and B?

Income

Leisure

A

B

A =B = b. Suppose the worker is always willing to give up $14 dollars of income for each hour of leisure. Do her preferences exhibit a diminishing marginal rate of substitution? How many hours per day will she choose to work?

B =

b. Suppose the worker is always willing to give up $14 dollars of income for each hour of leisure. Do her preferences exhibit a diminishing marginal rate of substitution?

Yes or No?

How many hours per day will she choose to work?

4. Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with workers’ compensation and has decided to cut the wages of its two employees (Albert and Sid) from $23 per hour to $20 per hour. Assume that Albert and Sid view income and leisure as “goods,” that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Albert and Sid’s opportunity set is presented below:

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