micro-ex-2

# micro-ex-2 - Ani Guerdjikova Department of Economics...

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Ani Guerdjikova Fall 2006 Department of Economics Intermediate Microeconomics Cornell University ECON 313 Problem Set 2 Problem 7 (Budget set) We consider two goods, apples ( A ) and bananas ( B ) . The prices are given by p A = 2 , p B = 4 . a) Suppose that Pete has an income y = 20 . Derive his budget constraint and draw it into a diagram. b) How does the budget constraint of Pete change if – a quantity tax of 2 is levied on apples; – a value tax of 25% is levied on bananas; – his mom forbids him to buy more than 5 apples; – mom increases Pete’s income to y = 40 ; – prices fall by 50% ? c) Suppose that Nicole has 2 apples and 4 bananas. Derive her budget constraint and draw it into a diagram. d) How does the budget constraint of Nicole change if – the price of bananas rises by 1 ; – both prices fall by 50% ; – her initial endowment of fruits is doubled? Problem 8 (Budget set) Farmer Frank has 200 units of money to buy wheat and straw. The market prices are given by p w = 20 and p s = 10 . Derive the budget constraint of farmer Frank and draw it into a diagram.

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