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Unformatted text preview: Economics 104A Solution for Problem Set #1 Winter 2010 1. Jims 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 Jims 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. Answer: See Figure 1. b. Draw his budget line with the trust found on the same diagram. Answer: See Figure 1. 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. Answer: If Jims preferences over combinations of dollars spent on education and dollars on spent other forms of consumption are represented by the ICs as in Figure 2, then his optimal bundle with the fund as an unrestricted trust would be better than his optimal bundle with the fund being a conditional trust (See Figure 2)....
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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.
- Winter '10