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Unformatted text preview: Intermediate Microeconomics (Econ101) Spring, 2009 Solutions to Additional Problems in Assignment 1 Solution to Question 1. First budget constraint: 4 x 1 + 5 x 2 ≤ 100 . Second budget constraint: The new budget line passes through two points: (30 , 0) and (25 , 5), thus it is the line x 1 + x 2 = 30. The budget set is: x 1 + x 2 ≤ 30. The new price ratio is 1, i.e., p 1 + t = p 2 , or 4 + t = 5. Therefore the quantity tax on good 1 is $1. Alice’s new income is 5 * 30 = 150, which means she got a raise of $50. The new budget constraint is: 5 x 1 + 5 x 2 ≤ 150. Note the new budget set is a super set of the old budget set. Since after the tax and the raise, Alice still can afford every combination of good 1 and 2 that she could afford before, she is better off. Solution to Question 2. A utility function that represents Leonard’s preferences is: u ( x 1 ,x 2 ) = x 1 + 3 x 2 . Since (3) and (4) are monotonic transformation of the above utility function, (adding/subtracting constants, taking square roots,) they represent Leonard’s preferences as well.constants, taking square roots,) they represent Leonard’s preferences as well....
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This note was uploaded on 09/27/2009 for the course ECON 101 taught by Professor Dannicatambay during the Spring '08 term at UPenn.
 Spring '08
 DANNICATAMBAY
 Microeconomics

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