500359 Microeconomics Tutorial Exercises 4 (2019-20).doc - 500359 \u2013 MICROECONOMICS \u2013 2019\/20 Class Exercises Problem Set 4 1(i Write out the budget

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500359 – MICROECONOMICS – 2019/20 Class Exercises Problem Set 4 1 (i) Write out the budget constraints for the following combination of prices and income: P X = 5, P Y = 2, M = 10 (ii) For the budget constraint in (i) above, calculate the slope and points where the line crosses the X-axis (X max ) and Y-axis (Y max ). Draw the budget constraint on a graph. (iii) Show what happens to the slope and position of the budget constraint in (i) when: (a) P X doubles; (b) P Y and P X both double; (c) P Y falls to 1.5; (d) M increases by 5. 2 Consider a consumer with preferences for apples (A) and bananas (B) given by the utility function U = AB. Let the prices of apples and bananas be £1 per unit and £2 per unit respectively, and let the consumer’s total available budget for the two goods be £12. (i) On a graph (with apples (A) on the horizontal axis and bananas (B) on the vertical axis) draw the indifference curves for U = 12, U = 18 and U = 24. On the same graph plot the budget constraint and identify (without the use of algebra) the optimal choice (utility maximising) of apples and bananas.

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