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Midterm2ReviewQs

# Midterm2ReviewQs - Harry spends all of his income on pizza...

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Harry spends all of his income on pizza and beer and initially consumes positive quantities of both goods. Subsequently, his income increases by 20 percent, price of pizza increases by 20 percent and price of beer remains unchanged . Comparing the budget lines before and after these changes, we find that his new budget line will: 2. Using the information from the previous question, which of the following statements is True ? a. If pizza is a normal good, Harry will always purchase less pizza b. If beer is a normal good, Harry will always purchase more beer. c. If beer is an inferior good, Harry will always purchase more beer. d. If pizza is a normal good, Harry will always purchase more pizza Could you please go over this question in class on Monday? Greg spends all of his income on apples and bananas and is originally consuming positive quantities of both. Suppose the price of bananas increases and bananas are an inferior good, then at the new equilibrium: a.) MRS of apples to bananas decreases b.) MRS of apples to bananas increases c.) MRS of apples to bananas stays constant d.) cannot determine 1. Mrs. X spends all her income on Apples and Bananas. If the price of both goods rises by 10 percent, which of these statements are correct? I. If we give Mrs. X 10 percent more income, she would be as happy as before the price increase. II. After the price increase, she will consume goods Apples and Bananas in the same proportion as before. III. After the price increase, she will consume more of the cheaper good. a. I only b. IandII c. I, II and III d. None of the above In this case, if bananas were on the x-axis and apples were on the y-axis, the budget line would pivot inwards because Greg would purchase less bananas but the same amount of apples. The MRS is the slope of the indifference curve at the new equilibrium point, so wouldn't it be greater than the original one? Thus making the MRS greater? The answer says that the MRS decreases...why is this? 4. Rebecca decides to allow Daniel to open and operate a lemonade stand on her front lawn for a flat fee of \$3 that includes the rental of the table as well as an unlimited supply of lemonade and cups. While the lemonade stand is in business, Daniel's total revenues are \$10, and so he pockets \$7. Which of the following is true?

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Midterm2ReviewQs - Harry spends all of his income on pizza...

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