chapter5questions

chapter5questions - 1. Every morning Professor Gordon buys...

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1. Every morning Professor Gordon buys a bagel and a cup of coffee from Peabody’s. At Peabody’s the price of bagels is $2.00 and the price of a cup of coffee is $1.00. a. Assuming that Professor Gordon has $20 to spend on coffee and bagels, sketch her budget constraint, putting coffee on the x-axis and bagels on the y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. b. Now, suppose that Peabody’s wants to encourage customer loyalty. To do so they start the following program: every time someone purchases 10 cups of coffee, they get the 11 th cup for free. Sketch Professor Gordon’s new budget constraint under the assumption that she still has $20 to spend on coffee. As above, put coffee on the x-axis and bagels on the y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. In addition, if there are any changes in the slope of the budget constraint, clearly identify the coordinates (i.e. the points) where those changes occur. NOTE: Think about this one carefully. a. coffee bagels 20 10 |slope|=1/2 b. coffee bagels 22 10 |slope|=1/2 10 11 21 5 3. Suppose that George is currently consuming 4 apples and 4 bananas. If the price of apples is .25 and George spends $6 on apples and bananas, then what is the price of bananas? Use the budget constraint equation to obtain: P1*X1+P2*X2=M. Let apples be X1 and
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bananas be X2. This gives us .25*4+P2*4=6. Solving for P2 we get that P2=1.25. So the price of bananas =1.25. 4. Suppose Dave has $100 to spend on entertainment every month and that Dave’s favorite forms of entertainment are movies and concerts. a. If the price of movies is $10 and the price of concerts is $20, draw Dave’s budget constraint for entertainment, putting movies on the horizontal axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. b. Now suppose that the local theatre where Dave always goes to watch movies offers the following special deal: Anyone who goes to more than 4 movies a month, can see any remaining movies in that month for half price. Draw Dave’s new monthly budget constraint for entertainment. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. In addition, if there are any changes in the slope of the budget constraint, clearly identify the coordinates (i.e. the points) where those changes occur. a. Recall the budget constraint equation P1*X1+P2*X2=M. If the price of movies is 10 and the price of concerts is 20 we have 10*X1+20*X2=100. If we solve for X2 we have the equation X2= -.1/2X1 + 5. The slope of the line is then given by P1/P2 = 10/20 =1/2. If he spent all his income on movies he would be able to buy I/P1 or 100/10 = 10 Movies. If he spent all his money on concerts he would be able to buy 5 concerts. Movies
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This note was uploaded on 08/02/2011 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

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chapter5questions - 1. Every morning Professor Gordon buys...

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