tutorial_1ansbb - ECOS2001 Intermediate Micro Economics...

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ECOS2001 Tutorial 1 Answers 1 ECOS2001 Intermediate Micro Economics Suggested sketch of the answers for Tutorial 1 Question 1: Your budget is such that if you spend your entire income, you can afford either 4 units of good x and 6 units of good y or 12units of x and 2 units of y. (1) Draw the budget line. Draw a straight line connecting the two points (4,6) and (12,2). Good Y 8 16 Good X (2) What is the opportunity cost of one unit of good x? The slope is -8/16 = -0.5, meaning that increasing x by 1 unit will reduce y by 0.5 units. Thus, the opportunity cost of one unit of good x is 0.5 units of y. (3) What is the opportunity cost of one unit of good y? Increasing y by 1 unit will reduce 2 units of good x. Thus the opportunity cost of one unit of good y is 2 units of good x. (This is the inverse of the slope of the budget line). (4) Write a budget equation that gives you this budget line, where the price of x is 1. x + 2y = 16 (5) Write another budget equation that gives you the same budget line, but where the price of x is 3. 3x + 6y = 48
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