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1. Suppose that we have 8 people who want to rent an apartment. Their reservation prices are given
below:
Person
A
B
C
D
E
F
G H
Price
40 25 30 35 10 18 15
5
(a) Plot the market demand curve where you have price in the vertical axis and number of apartments
in the horizontal axis.
(b) Suppose the supply of aparments is xed at 5 units. A whole range of prices can be equilibrium
prices. What is the highest price that would make the demand equal to 5 units?
(c) What is the lowest price that would make demand equal to 5 units.
(d) With a supply of 4 apartments, which individuals (AH) end up getting them?
(e) If the supply of aparments were to increase to 6 units what would be the range of equilibrium
prices?
2. Yo have an income of $40 to spend on two commodities. Commodity 1 costs $10 per unit, commodity
two costs $5 per unit.
(a) Write down your budget equation
(b) If you spent all your income on commodity 1, how much could you buy?
(c) If you spent all your income on commodity 2, how much could you buy? Draw you budget
constraint where you plot commodity 1 on the horizaontal axis and commodity 2 on the vertical
axis using blue.
(d) Suppose that, everything else the same, the price of commodity 1 falls $5. What is your new
budget equation? In the same graph tha you used for c, plot this new budget contraint (use
another color, in this case red)
(e) Suppose that the amount you are allowed to spend falls to $30, while the prices of both com
modities remain constant at $5. Write down your new budget equation. Using black ink plot
this new budget line in the graph.
(f) On your diagram, shade in blue the area representing commodity bundles that you can a ord
under the conditions in part (e) but that you could not a ors under the conditions in part (a).
Shade in black the area representing commodities you could a ord under the conditions in part
(a) but cannot a ord under the conditions in part (e)
3. Your budget is such that if you spend your entire income, you can a ord either 4 units of good x and
6 units of good y or 12 units of x and 2 units of y.
(a) Mark these two consumption bundles and draw the budget line with x in the horizaontal axes
and y in the vertical axes.
(b) What is the ratio of the price of x to the price of y?
(c) If you spent all of your income on x, how much x could you buy?
(d) If you spent all of your income on y, how much y could you buy?
1
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View Full Document(e) Write a budget equation that gives you this budget line, where the price of x is 1
(f) Write another budget equation that gives you the same budget line, but where the price of x is
3
4. In a small country near the Baltic Sea, there are only three commodities: potatoes, meatballs, and
jam. Prices have been remarkably stable for the last 50 years or so. Potatoes cost 2 crowns per sack,
meatballs cost 4 crowns per crock, and jam costs 6 crowns per jar.
(a) Write down a budget equation for a citizen named Gunnar who has an income of 360 crowns per
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 Fall '08
 Hansen
 Microeconomics

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