tutorial_4ans - ECOS 2001 Tutorial 4 1. Decide whether each...

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ECOS2001 Tutorial 4 1 ECOS 2001 Tutorial 4 1. Decide whether each of the following statements is true or false. (a) “If the agent is a saver and the interest rate declines, if the agent continues to save the change in her welfare is ambiguous.” (b) “If an agent is a borrower and the interest rate falls, he will not become a saver.” (a) False, the saver is unambiguously worse off because she ends up consuming (and saving) at a point inside her initial budget set. The consumer revealed that she preferred her original choice to her new choice; the decline in interest rates have made her worse off. Use a diagram to discuss (b) True – because to become a saver the borrower would have to choose a point inside his original budget set, a point that he revealed was less preferred than his choice (borrowing). Again, show on a diagram. 2. In Gas Pump there are two types of consumers, Buick owners and Dodge owners. Every Buick owner has a demand for petrol 20 5 B Dp = for p 4 and D B (p) = 0 for p > 4. Every Dodge owner has a demand function D D (p) = 15 – 3p for p 5 and D D (p) = 0 for p > 5. (Quantities are measured in litres and price is
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tutorial_4ans - ECOS 2001 Tutorial 4 1. Decide whether each...

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