ps3an - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2005 Wei Zhang Problem Set 3: Answer Key 1. Recall that Lewis’ income each month is \$500. Beer costs \$2 a bottle, and cheese costs \$5 per pound. a) If Lewis spent all of his income each month on beer, he could consume: I/P B = \$500/\$2 = 250 bottles of beer per month. b) If Lewis spent all of his income each month on cheese, he could consume: I/P C = \$500/\$5 = 100 d) The slope of Lewis’ budget constraint = -P C \P B = -5/2 = -2.5 e) If Lewis’ income doubled while prices remained unchanged, his budget constraint would shift out as shown below. The slope of the budget constraint would remain unchanged, since prices (and therefore the ratio of prices) remain unchanged.

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f) If Lewis’ income doubled, but prices also doubled, Lewis’ budget constraint would be the same as in part c. The vertical intercept: I/P B = \$1000/\$4 = 250 bottles of beer per month (the same as in part c.). Similarly, the horizontal intercept would also remain unchanged: I/P C = \$1000/\$10 = 100 pounds of cheese per month.
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ps3an - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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