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Econ_55D_Final_Exam

# Econ_55D_Final_Exam - ECON 55D Fall 2007 Professor Paul...

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Your Name: 1. Your preferences are defined over shoes and socks. You are going to the shoe store, which sells both shoes and socks. Every pair of shoes is \$10 and every pair of socks is \$5. You have \$50. (a) Since it is fashionable to wear footware without socks, let’s assume that socks are non- essential for you. With socks on the y -axis and footware on the x -axis, draw your budget constraint and optimal bundle. Draw at least three indifference curves. (Assume that socks and footware are not perfect substitutes and tastes are convex.) (b) At the shoe store you meet your unfashionable friend, Tom Wolfe. Both shoes and socks are essential for Tom. He also has homothetic preferences. Illustrate Tom’s optimal bundle if he has \$50, like you, and also if he has \$100. (c) Let’s suppose Tom has a coupon that let’s him buy shoes for half price after he has bought two pairs. Draw Tom’s new budget constraint accurately . (d) Suppose Tom’s optimal bundle without the coupon is 1 pair of shoes and 8 pairs of socks. Can you tell what his new optimal bundle will be after the coupon? Explain! (e) Suppose Tom’s optimal bundle prior to the coupon was 3 pairs of shoes and 4 pairs of socks. Illustrate this optimum. Now draw the new budget constraint with the coupon and also indicate a possible new optimum (recall that preferences are homothetic). (f) (Continues the previous problem). What can we say about Tom’s consumption of shoes with the coupon (increases/decreases/cannot say)? What can we say about Tom’s con- sumption of socks with the coupon (increases/decreases/cannot say)? 2