Problem_Set_9_Answers

Problem_Set_9_Answers - 251 Answers to Problems on Consumer...

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251 Answers to Problems on Consumer Demand. Answer to Problem 9.1. A consumer has a budget of $30 and faces per unit prices of p X = $5 and p Y = $3 for commodities X and Y. Use q X and q Y to denote quantities of commodities X and Y. If you wish, you can use Figure 9.10 to help you to answer the following questions. Figure 9.10: (i) What is the equation of the consumer’s budget constraint? Answer. 5 q X + 3 q Y = 30 . (ii) If the consumer spends all $30 on buying commodity X then what bundle does she purchase? Answer. The bundle containing 6 units of commodity X and zero units of commod- ity Y; i.e. the bundle (6 , 0). (iii) If the consumer spends all $30 on buying commodity Y then what bundle does she purchase?
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252 CHAPTER 9. CONSUMER DEMAND Answer. The bundle containing zero units of commodity X and 10 units of com- modity Y; i.e. the bundle (0 , 10). (iv) What area is the consumer’s budget set? Answer. The triangle with vertices at (0 , 0), (6 , 0) and (0 , 10). (v) What is the slope of the consumer’s budget constraint? Do not forget to include both the sign and the units of measurement. Answer. -5/3 commodity Y units per commodity X unit. (vi) When the consumer’s budget is fully allocated, what is her opportunity cost of purchasing one more unit of commodity X? Answer. 5 / 3 forgone commodity Y units. (vii) When the consumer’s budget is fully allocated, what is her opportunity cost of purchasing one more unit of commodity Y? Answer. 3 / 5 forgone commodity X units. (viii) When the consumer’s budget is not fully allocated, what is her opportunity cost of purchasing a little bit more of commodity X? Answer. Zero commodity Y units. Answer to Problem 9.2. Joe has $100 to spend on cheese and crackers. Each packet of cheese costs him $1 and each packet of crackers costs him $2. If you wish, you can use Figure 9.11 to help you to answer the following questions. (i) What is the largest quantity of cheese that Joe can purchase and, if he buys this amount of cheese, how many cracker packets will he buy? Answer. Joe can purchase at most 100 packets of cheese. If he does so then he will have spent all his $100 and so will not be able to purchase any crackers. (ii) On a diagram with cheese packets measured on the horizontal axis and with cracker packets measured on the vertical axis, plot the consumption bundle that represents Joe spending all $100 on cheese. (iii) What is the largest quantity of crackers that Joe can purchase and, if he buys this amount of crackers, how many packets of cheese will he buy? On your diagram, plot the consumption bundle that represents Joe spending all $100 on crackers. Answer. The largest quantity of crackers that Joe can purchase is 100 / 2 = 50 packets. Since this will cost him $100 he will not be able to purchase any cheese. (iv)
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This note was uploaded on 03/01/2011 for the course ECO 182 taught by Professor Morgan during the Spring '08 term at SUNY Buffalo.

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Problem_Set_9_Answers - 251 Answers to Problems on Consumer...

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