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Problem set 8

# Problem set 8 - Suppose the price of books is \$40 and the...

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Problem Set 8 Discussion Sections Economics 200 1. Suppose a consumer has income of \$20, the price of X is \$2 per unit, and the price of Y is \$4 per unit. (a) Draw this consumer’s budget constraint. (b) Show in diagrams how the budget constraint would change in each of the following cases: (i) income rose to \$32 and both prices remained constant, (ii) the price of X rose to \$4 while income and the price of Y remained constant, (iii) the price of Y fell to \$1 while income and the price of X remained constant, and (iv) income and both prices all doubled. 2. Suppose your willingness to pay for ice cream is as follows: Gallons of Ice Cream Willingness to Pay 1 \$10 2 \$7 3 \$5 4 \$3 5 \$2 6 \$1 (a) Suppose the price of one gallon of ice cream is \$3. How much ice cream would you consume? Defend your answer carefully. (b) Calculate your consumer surplus when the price of one gallon of ice cream is \$3. 3. Joan earns \$1,000 dollars a month and spends her income on clothing and books.
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Unformatted text preview: Suppose the price of books is \$40 and the price of clothing is \$25. (a) Show Joan’s budget constraint in a diagram. Identify the slope and intercepts of this budget constraint. (b) Senator Green has proposed placing a \$10 tax on each book a consumer purchases. Show Joan’s budget constraint under the Green proposal in your diagram. Identify the slope and intercepts of this budget constraint. (c) Senator Smith has offered an alternative to the Green bill. Under the Smith proposal, the government would offer a \$5 subsidy for each unit of clothing a consumer purchases, would not tax books, but would impose a 20 percent tax on income. Would Joan prefer the Green proposal to the Smith proposal, would she prefer the Smith proposal to the Green proposal, or would she be indifferent between the two proposals?...
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