10HW1 - the food stamps respectively Label your diagram completely b When the price of a good say good 1 is $5 per unit Jack consumes 1,000 units

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Economics 104A Problem Set #1 (Due Jan 21) Winter 2010 1. Jim’s parents have provided a trust fund for his college education. Jim can receive the entire trust fund on the condition that he spend it only on education. a. Draw Jim’s budget line without the trust fund by putting dollars spent on education on the horizontal axis and dollars spent on other forms of consumption on the vertical axis. b. Draw his budget line with the trust found on the same diagram. c. Use the budget line and the ICs to illustrate why the fund is a welcome gift but perhaps not as welcome as an unrestricted trust. 2. a. Consider food consumption (good F) and consumption on all other goods (good C) for a consumer. Suppose p F = p C = 1. The consumer has income m . The government can compensate the consumer with either a subsidy of $100 in cash or with $100 worth of food stamps. Draw the budget lines with the subsidy and
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Unformatted text preview: the food stamps, respectively. Label your diagram completely. b. When the price of a good, say good 1, is $5 per unit, Jack consumes 1,000 units. The price rises to $5.50, and to offset the harm to Jack, the government gives him a cash transfer of $500. Use IC’s and budget lines to determine whether Jack is better off or worse off after the price rise plus the cash transfer. Label your diagram completely. 3. a. Let u ( x 1 ,x 2 ) = ln( x 1 + x 2 ) be a utility function for a consumer. Are the two goods perfect substitutes? Explain why or why not. Draw the IC with utility level 0. b. Let u ( x 1 ,x 2 ) = √ x 1 x 2 be a utility function for a consumer and let m = $200 be the consumer’s income. Is bundle X = (16 , 12) affordable at prices p 1 = $5, p 2 = $10, and is it optimal? Why or why not? 1...
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This note was uploaded on 08/27/2011 for the course ECON 104 taught by Professor Staff during the Winter '10 term at UCSB.

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