solutions2[1]

solutions2[1] - EC201 Fall 2007 Prof Jordi Jaumandreu...

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EC201, Fall 2007, Prof. Jordi Jaumandreu Solutions to Problem set #2 Consumer Theory 1. Let’s have Canadian gasoline in the x-axis and suppose for simplicity that this is just the price that changes. The budget line has an inclination of 45 o if prices are the same, is steeper if the price of Canadian gasoline goes up and f atter if goes down. Indi f erence curves have always a slope of 45 o (goods are presumably perfect substitutes). When the price goes up the highest curve that touches the budget line implies that all gasoline is purchased in the US, when price goes down all gasoline is purchased in Canada, when prices remain the same the consumer is indi f erent (multiple equilibria). 2. Indi f erence curves have a kink and vertex lie on the ray that bisects the plane into equal halves. Let’s have buns on the x-axis and rotate the budget line around the intercept on the y-axis. The highest reachable curve always touches the budget line on the crossing with the ray. When the price of buns goes up, consumption of both buns and hot dogs are reduced in the same proportion. 3. Construct a plane gasoline-other goods with gasoline on the x-axis A speci F ctaxonga so l in eha sth

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This note was uploaded on 07/16/2009 for the course EC 201 taught by Professor Idson during the Fall '08 term at BU.

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solutions2[1] - EC201 Fall 2007 Prof Jordi Jaumandreu...

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