Econ_102A_PS1 - Q2 Shania has $80 that she can spend at the...

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Summer 2009 / Econ 102A / Homework 1 / Due in Class Q1. Consider an economy with two goods X and Y with respective prices P X and P Y . The consumer has M dollars of income. (a) Write down the consumer’s budget constraint. Write down her budget set. (b) Draw the consumer’s budget set. Label all slopes and intercepts. (c) Show a point where the consumer does not exhaust her entire budget and label it A on the diagram you just drew. Now label a point B where the consumer uses all of his income. Finally, label C for unaffordable bundle of goods. (d) Suppose the price of good X doubles. Draw the new budget constraint. Clearly label all slopes and intercepts. (e) Now suppose that the prices of both X and Y double from P X and P Y . Label all slopes and intercepts. Has the price change affected the slope of the new budget constraint? Has it changed the intercepts? (f) What happens if his income also doubles when the prices double? Explain the economic intuition (hint: how has the budget set changed?).
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Unformatted text preview: Q2. Shania has $80 that she can spend at the mall on CD’s or mystery novels. In each of the following situations, draw Shania’s budget constraint. Label slope, intercepts and kink point(s) for each question a-e below. (a) The prices of CD’s and mystery novels are $16 and $8 dollars respectively. (b) The price of a mystery novel is $8. However, the music store has a special promotion offering two free CD’s if he purchases one at the regular price of $16. All CD’s purchased afterwards cost $16 each. (c) Shania receives a $16 dollar gift card for the mall that can be used at either the music store or the bookstore. (d) Shaggy receives a coupon good for a 25% discount only on books. (e) The music store offers a promotion such that if you buy 2 CD’s at the regular price of $16, each additional CD purchased only costs $8. The price of mystery novels is still $8....
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