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201-2008_ps_6 - Problem set 6 Ec 201 Michigan State...

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Problem set # 6 Ec 201 Spring, 2008 Michigan State University L. Martin 1. Pi Upsilon Delta, which is not the most prestigious house on campus, has received a contribution of $10,000 from its only successful alumnus. The fraternity advisory council is considering site licenses for educational software (in a probably vain attempt to improve the historical graduation rate) and sand-covered volley ball courts. Site licenses are $1,000 each and the cost of an ersatz beach volleyball court is $250. a. Draw the budget constraint. Measure site licenses along the horizontal axis. b. The software company announces a price cut to $500. Draw the new budget constraint. c. At the original price of software the council would have chosen 2 site licenses. Illustrate the substitution and income effects of the price reduction. d. The donor reconsiders his gift. He decides to give the fraternity 10 site licenses (the price is now $500) and $5,000. Fred, the fraternity's economics major says, "Oh well, the monetary value of the gift is still $10,000; so we are just as well off."
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