01282009160907S1eFSJwScT - Homework II Principles of...

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1 Homework II Principles of Microeconomics 1101 Lecture 017 Fall Semester – 2008 Mike Walrath Due 10/06/08 Note: Homework must be turned in at the end of lecture on Monday, 10/06/08 (see syllabus for late homework policy). Your homework must be in chronological order. Answer questions in order and please put all tables and graphs in the same area as your answer . Type everything but graphs and calculations for full credit. Label all graphs for full credit. Show all work. Bonus Question (5 points) Write your TA’s name and section number on the top right of the first page of your homework. Question 1 (18 points) Suppose Kate can only purchase Daewoo TV’s and Daewoo VCR’s. Kate has $1,000. A Daewoo TV costs $125 and a Daewoo VCR costs $125. (a) Putting TV’s on the Y-axis, draw Kate’s budget constraint. (b) Illustrate Kate’s optimal consumption bundle (using indifference curves like those seen in class). Now suppose that Daewoo TV’s are inferior and Daewoo VCR’s are normal. (c) Now suppose the price of Daewoo VCR’s decreases to $100. Graphically illustrate the effects of this price change. Clearly illustrate the income and substitution effects. Question 2 (18 points) Suppose Liz can only purchase hot dogs and sandwiches. Liz has $20. Hot dogs cost $1 and sandwiches cost $4. (a)
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01282009160907S1eFSJwScT - Homework II Principles of...

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