econ11_08_ps3

econ11_08_ps3 - Eco11, Fall 2008 Simon Board Economics 11:...

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Eco11, Fall 2008 Simon Board Economics 11: Practice Problems 3 (Week 4) October 16, 2008 1. Budget Sets There are two goods: x 1 and x 2 with prices p 1 = 2 and p 2 = 2. Suppose the government subsidises the first 10 units of x 1 by $1. Draw the budget curves for m = 8, m = 12 and m = 16 2. Income Effects and Quasilinear Utility Suppose utility has the form u ( x 1 ,x 2 ) = x 1 / 2 1 + x 2 . Let p 1 = 1 and p 2 = 2. Derive the consumer’s income offer curve. 3. Price Changes Joseph likes roses (R) and tulips (T) equally, and views them as perfect substitutes in proportion 1 to 1. a) What are Joseph’s demand functions for roses and tulips (as a function of income and prices)? Suppose the price of a rose is $3, the price of a tulip is $5, and Joseph has $30 to expend in flowers. c) How much of each flower will Joseph buy? c) Now, suppose that the price of a rose rises to $6. How does the consumption of Joseph change? d) How much should Joseph’s income increase to compensate for the rise in the price of roses?
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econ11_08_ps3 - Eco11, Fall 2008 Simon Board Economics 11:...

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