Practice for Midterm 1

Practice for Midterm 1 - 2 the consumer selects basket A...

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ECON – 301 Practice for Midterm 1 1) A consumer with a fixed income of $2000 enjoys both food, F, and a composite good, Y. The price of Y is $1 per unit. The price of food is $5 per unit. Question: At the optimal consumption basket, what is the slope of the consumer’s indifference curve? What is the economic meaning of this slope? 2) A consumer has an income of £10 that he may spend on two goods, x and y. Let price set 1 be (p x1 = £0.5 and p y1 = £2) and price set 2 be (p x2 = £1 and p y2 = £1). Call the budget line under price set 1 "BL 1 " and the budget line under price set 2 "BL 2 ". Consider the following consumption baskets, where the units of x are listed first and the units of y consumed are listed second: Case 1: Basket A = (9,1); Basket B = (20/3,10/3) Case 2: Basket A = (1,9); Basket B = (20/3,10/3) a. Carefully illustrate the baskets of each case in a budget line diagram. b. Suppose that, in each case, when the budget line is BL
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Unformatted text preview: 2 , the consumer selects basket A. When the budget line is BL 1 , the consumer selects basket B. What can be said about the way the consumer ranks the baskets in each case? 3) A consumer can spend her fixed income, I , on two products, food ( F ) and luxuries ( L ). The consumer’s tastes are represented by the following utility function: U = FL Where the marginal utilities of F and L are MU F = L and MU L = F and prices are P F and P L for goods F and L, respectively. Question: Are luxuries a normal good for this consumer? Please show all your work and explain your reasoning carefully. 4) Jim’s preference over pizza (x) and other good (y) are given by U(x,y)=xy. His income is $120. a. Calculate his basket when price of pizza is 4 and price of y is 1. b. Calculate his income and substitution effect of a decrease in the price of food to $3....
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