Econ 1: Tang
Fall Quarter 2007
Homework 4: Chapter 8
Due Wednesday November 14, at the beginning of class.
Please write your name, PID, and section number/TA name on your homework.
1. Suppose that Marvin is currently consuming 4 apples and 4 bananas. If the
price of apples is .25 and Marvin spends $6 on apples and bananas, then what is
the price of bananas?
We know that Pa*A+Pb*B=I and that A=4, B=4, Pa=.25, and I=6.
We want to solve for Pb.
By rearranging the budget equation, we can express Pb in terms of variables of which we
know the values.
Pb*B=I(Pa*A) or Pb=(I(Pa*A))/B
So Pb=(6(.25*4))/4= (61)/4=5/4 or $1.25
2. Every morning Kristen buys a bagel and a cup of coffee from Peabody’s.
At
Peabody’s the price of bagels is $2.00 and the price of a cup of coffee is $1.00.
a.
Assuming that Kristen has $20 to spend on coffee and bagels, sketch her
budget constraint, putting coffee on the xaxis and bagels on the yaxis.
Clearly label a) the xintercept, b) the yintercept, c) and the slope of the
budget constraint.
b.
Now, suppose that Peabody’s wants to encourage customer loyalty.
To
do so they start the following program: every time someone purchases 10
cups of coffee, they get the 11
th
cup for free.
Sketch Kristen’s new budget
constraint under the assumption that she still has $20 to spend on coffee.
As above, put coffee on the xaxis and bagels on the yaxis.
Clearly label
a) the xintercept, b) the yintercept, c) and the slope of the budget
constraint.
In addition, if there are any changes in the slope of the budget
constraint, clearly identify the coordinates (i.e. the points) where those
changes occur.
a.
coffee
bagels
20
10
slope=1/2
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Fall Quarter 2007
b.
coffee
bagels
22
10
slope=1/2
10 11
21
3. Suppose that George likes to eat yogurt every morning for breakfast but he
doesn’t care if he eats Dannon yogurt or Alta Dena yogurt. For him they are
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 Spring '08
 TANG
 Randall

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