1
ECON191
Spring 2009
Outline of suggested solutions to Problem Set 2
1)
True (or uncertain). People will work longer hours
2)
False
3)
Pindyck, Rubinfeld and Koh, p. 105, # 15.
a)
The indifference curve with a utility of 800 has the equation 10DF=800, or DF=80. Choose
combinations of D and F whose product is 80 to find a few bundles. The indifference curve with a
utility of 1200 has the equation 10DF=1200, or DF=120. Choose combinations of D and F whose
product is 120 to find a few bundles.
b)
If Jane spends all of her budget on domestic travel she can afford 40 days. If she spends all of her
budget on foreign travel she can afford 10 days.
The invention shifts the budget constraint to the right. Assume
that both wage income and leisure are normal good, the
quantity demand for income and leisure will go up, that means
working hours must go up.
Leisure
hours
Income
b
a
20
16
20w
16w
At restaurant A, he spends $100. At B, he also spends $100. the
diagram shows his budget constraints at A and B.
When he is at restaurant A, both
a
and
b
(it costs $80 in restaurant
A) are feasible, but he has chosen
a
. Therefore, he has revealed his
preference: he prefers
a
to
b
.
At restaurant B, both
a
(it costs $90 at restaurant B) and
b
are
feasible, but he has revealed that he prefers
b
to
a
. His behavior
violates weak axiom of revealed preference (WARP). He is not
behaving rationally.
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 Spring '08
 Chen
 Microeconomics

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