ps3 - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2005 Wei Zhang Problem Set 3 Due by September 26, 2005 (in class) Consumer Choice 1. The Budget Constraint . Suppose Lewis lives in a world with only two goods, beer and cheese. Lewis’ income each month is $500. Beer costs $2 a bottle, and cheese costs $5 per pound. a) If Lewis spends all of his income each month on beer, how much beer could he consume? b) If Lewis spends all of his income each month on cheese, how much cheese could he consume? c) Graph Lewis’ budget constraint with beer on the vertical axis, and shade in the area representing all the bundles of beer and cheese that Lewis can afford. d) What is the slope of Lewis’ budget constraint? e) Suppose Lewis’ income doubled while prices remained unchanged. What would happen to his budget constraint? Show this on your graph. f) Now suppose that Lewis’ income doubled, but that prices also doubled. Now what would happen to his budget constraint? Explain.
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This note was uploaded on 07/28/2010 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at Wisconsin.

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ps3 - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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