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191hw2sol

# 191hw2sol - ECON191 Spring 2009 Outline of suggested...

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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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191hw2sol - ECON191 Spring 2009 Outline of suggested...

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