PS1&2_Solutions

# PS1&2_Solutions - Econ306 Intermediate Microeconomics...

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Econ306 – Intermediate Microeconomics Question 1 ( 1 point ) (i) ( 0.5 points ) The intercept with the “food” axis is given by the quantity of food that could be bought if all the income were spent only on food: \$300 \$30 = 10 units. Similarly, the intercept with the “all other goods” axis is \$300 \$10 = 30 units. Finally, the slope of the budget line is given by the negative of the price ratio (suppose food is on the horizontal axis): - 30 10 = - 3. Figure 1: Budget line, food versus all other goods (ii) ( 0.5 points ) At the optimal consumption bundle, the following must hold: MU food MU og = p food p og 5 MU og = 30 10 MU og = 5 · 10 30 = 1 . 67 utils Question 2 ( 1.5 points ) When the price of a mile changes, so does the slope of the budget constraint. First, note that the intercept with the “all other goods” axis is equal to \$5 , 000 \$0 . 1 = 50 , 000 units. Starting from this point, which corresponds to zero miles bought, and up until the consumer buys 30 , 000 miles, the slope of the budget set is given by the ratio of the full price of a mile and the price of all other 1

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goods: - \$0 . 1 \$0 . 1 = - 1. When the consumer buys between 20 , 000 and 30 , 000 miles, the price of a mile is reduced to \$0 . 08, meaning that the slope of the budge line falls to - \$0 . 08 \$0 . 1 = - 0 . 8. Finally, when the consumer buys more than 50 , 000 miles, the price per mile falls to \$0 . 05 and the slope of the budget line becomes - \$0 . 05 \$0 . 1 = - 0 . 5. Note that the intercept with the “miles” axis is at \$5 , 000 \$0 . 05 = 100 , 000 miles. Figure 2: Budget line, miles versus all other goods Question 3 ( 1 + extra 1 points ) (i) ( 0.5 points ) Suppose football games are represented on the vertical axis and basketball games on the horizontal axis. The two intercepts are then: \$50 \$5 = 10 football games and \$50 \$10 = 5 basketball games. The slope of the budget line is - \$10 \$5 = - 2, as you can see in ﬁgure 3(a). (ii)
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## This note was uploaded on 05/18/2008 for the course ECON 306 taught by Professor Cramton during the Fall '06 term at Maryland.

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PS1&2_Solutions - Econ306 Intermediate Microeconomics...

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