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Econ_102A_PS1_Answer - Thus if everything becomes twice as...

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Econ 102A Problem Set 1 Solutions #1) a) Budget Constraint: Px*X+Py*Y=M Budget Set: { (X,Y) | Px*X+Py*Y≤ M } Note that I and M are the same. e) Lets look at the budget constraint. Suppose we double all prices and income. Then the budget constraint becomes: 2Px*X+2Py*Y=2*I = 2 (Px*X+Py*Y)=2*M The factors of 2 cancel each other out on both sides to yield = Px*X+Py*y=I which is the unchanged budget constraint.

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Unformatted text preview: Thus, if everything becomes twice as expensive but you are given twice as much spending money as before, you are essentially just as well off if prices had never doubled in the first place. #2) Price of a CD is Pcd = \$16; Price of book is Pb = \$8; Income is M = \$80 a) b) c) d) e)...
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