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# Problem Set 2 - Rice University Professor Diamond PROBLEM SET 2 BUDGET SETS AND PREFERENCES UTILITY AND CHOICE Due by 3:00 on Economics 370

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Rice University Economics 370 Professor Diamond Microeconomic Theory PROBLEM SET 2: BUDGET SETS AND PREFERENCES UTILITY AND CHOICE Due by 3:00 on September 11, 2008 I. Suppose that a consumer faces a budget line p 1 x 1 + p 2 x 2 = m . Then price of good 1 triples, the price of good 2 becomes six times larger, and income becomes nine times larger. 1. Write an equation for the new budget line. 2. Draw the new budget line on the same graph as the first. II. Suppose the price of electricity is \$7 per 100 kwh (h-kwh) per month. There is no tax for the first 10 h-kwh, a 10% tax for 10-20 h-kwh, a 20% tax for 20-30 h-kwh, a 30% tax for 30 or more h-kwh. Note that tax applies only to the units in the relevant range, not earlier units. Assume a consumer has a fixed budget of \$600 per month for utilities, so the axes are electricity and all other utilities, with the price of all other utilities p 2 =1. Draw the budget constraint for an individual facing this price structure. III.

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## This note was uploaded on 09/20/2008 for the course ECON 370 taught by Professor Diamond during the Spring '08 term at Rice.

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Problem Set 2 - Rice University Professor Diamond PROBLEM SET 2 BUDGET SETS AND PREFERENCES UTILITY AND CHOICE Due by 3:00 on Economics 370

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