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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View Full Documentf) 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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 Fall '07
 Hansen
 Economics, Microeconomics, Marginal rate of substitution, Substitute good

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