Tutorial_3_Solution - Tutorial 3 Solution 12 February 2009...

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(Chapter 4 including Appendix) Question 1 - Rat ional Consumption Rats like root beer, quinine not so much - but their consumption habits, as with most creatures - are affected by the relative price of root beer and quinine. Rats earn income running around a wheel, and initially they can afford 8 root beers or 16 quinine cans. A certain economist has given up on humans behaving rationally, and decides to run an experiment on these rats. The economist changes the price of quinine, so that rats can only afford 8 quinine cans. Please graph the appropriate budget constraints to illustrate the situation above. (Quinine on the x-axis) a) How does the relative price of quinine/root beer change? b) Initially quinine is half the price of root beer, and after its price increases, they both cost the same. I.e. P x /p y is initially 1/2 and becomes 1 after the price change Experimental data reveals that prior to the increase in the price of quinine Ratty consumed 3 units of quinine, and after the price
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This note was uploaded on 05/23/2011 for the course ECON 203 taught by Professor Jules during the Spring '11 term at University of Cape Town.

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Tutorial_3_Solution - Tutorial 3 Solution 12 February 2009...

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