PAM_2000_Sp_2009_Problem_Set_3 - PAM 2000 Intermediate...

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1 PAM 2000, Intermediate Microeconomics Problem Set 3 Return to TA by beginning of class Tuesday, March 3 I. True, False or Uncertain. Explain . No credit given without explanation. Use graphs to help explain your answer whenever possible (2 points each). Total: 8 points 1) If a consumer is compensated for the income effect that occurs when the price of a good increases, then his demand curves can never slope upward. 2) Suppose Sue consumes only two goods, bananas and pears. If the price of bananas rises, then the quantity of pears consumed will always fall (use the consumer equilibrium diagram to help explain your answer). 3) If the Engel curve for a good is upward sloping, the demand curve for that good must be downward sloping. . 4) Using the CPI to compensate workers for inflation is appropriate because, in the face of a change in relative prices, people should be allowed to purchase the same bundle as they did before the price changes. II. Problem Solving (2.5 points each) total: 5 points 1) Draw budget constraints, indifference curves, and the income consumption curve for a good that has an income elasticity that is perfectly inelastic (i.e. equal to zero). 2) John is indifferent between canned soup and fresh soup. Canned soup sells for $1 per serving and fresh soup sells for $2 per serving. Assuming that John has allocated $4 toward soup, how will he spend it? Explain your answer by drawing John's budget line and indifference curves.
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2 III. Multiple Choice (2 points each) total: 12 points Figure 1 1) Figure 1 shows John's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on John's demand curve for snacks? A) p = 2, q = 10 B) p = 2, q = 13 C) p = 2, q = 5 D) p = 1, q = 20
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