Problem Set 1 - Solution

Problem Set 1 - Solution - Econ 313-1 TA: Tian Liang...

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Econ 313-1 TA: Tian Liang Solutions to Problem Set 1 1. (a) x - cereal, p x = 0 : 25 y - composite commodity, p y = 1 m - income, m = 25 i. If Bob devoted his full daily income to cereal, then x = m p x = 25 0 : 25 = 100 : If Bob devoted his full daily income to the composite commodity, then y = m p y = 25 1 = 25 : ii. Budget set: p x x + p y y 6 m 0 : 25 x + y 6 25 Budget line: 0 : 25 x + y = 25 y = 25 & 0 : 25 x 1
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The slope of the budget line is & 0 : 25 . It is the opportunity cost of consuming cereal. In order to consume 1 more unit of cereal, Bob needs to give up 0 : 25 units of the composite commodity. iii. New price of cereal: p 0 x = 0 : 25 ± (1 + 20%) = 0 : 3 New budget set: 0 : 3 x + y 6 25 iv. New income: m 0 = 25 ± (1 + 20%) = 30 New budget set: 0 : 3 x + y 6 30 2
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(b) x - egg, y - tomato i. x = 100 , y = 10 ii. p x = 0 : 1 , p y = 1 : 5 m = p x x + p y y = 0 : 1 100 + 1 : 5 10 = 25 If Frank used all of his resources to buy tomatoes, then y = m p y = 50 3 : If Frank used all of his resources to buy eggs, then x = m p x = 250 : Budget set: 0 : 1 x + 1 : 5 y 6 25 3
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iii. New income: m 0 = p
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This note was uploaded on 06/27/2008 for the course ECON 3130 taught by Professor Masson during the Spring '06 term at Cornell.

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Problem Set 1 - Solution - Econ 313-1 TA: Tian Liang...

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