Problem_Set_Two - 2 Consider the budget line below Income is $100 per month and the price of the x good is $10 and the price of the y good is $10

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P Q P Q s d 100 100 6000 = - = ECON 251 Instructor: Justin Krieg Econ 251: Problem Set Two 1. Consider the following demand and supply schedule for hay. a. Find the market equilibrium quantity and price. Graph these results. b. Suppose the government places a $10 price ceiling for hay. Does a shortage or surplus result? How large is the shortage/surplus? c. On a graph similar to part a. (if you drew you graph in a large enough you may use that graph) draw the effects of a $10 price ceiling on the market for hay. On the graph indicate the areas of producer surplus, consumer surplus and deadweight loss. d. Find the black market price for hay. e. A price ceiling is supposed to benefit consumers by offering them a lower price. Are consumers strictly better off with this price ceiling? Explain your answer.
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Unformatted text preview: 2. Consider the budget line below. Income is $100 per month, and the price of the x good is $10 and the price of the y good is $10. Please answer the following questions. a. Explain why bundle A is not a utility maximizing choice. Be sure to define relative price and marginal rate of substitution in your answer and use them in your explanation. b. Graph the new budget line if the price of the x good falls to $5. Find the new bundle ( 29 2 2 , x y graphically that maximizes utility given the change. c. Graph the new budget line if the price of the x good falls to $5 and income falls to $50. Find the new bundle ( 29 3 3 , x y that maximizes utility given this change. 2 4 6 8 10 12 2 4 6 8 10 12 Good x Good y IC 1 IC 2 A B 1 x 1 y...
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This note was uploaded on 01/09/2011 for the course ECON 251 taught by Professor Blanchard during the Summer '08 term at Purdue University-West Lafayette.

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