Problem Set 2 - Dept of Economics University of Iowa Fall...

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Dept of Economics Fall 2010 University of Iowa Professor Sarah Frank 06E:001:SCB Principles of Microeconomics Problem Set 2 Due Tuesday, October 5 in class 1) Suppose that a household has been choosing its consumption of travel and everything else to maximize its utility. Then, as a result of increased airfares, the price of travel rises. a. Draw the household’s budget constraint, with travel is on the horizontal axis and everything else the household buys is on the vertical axis. How will the rise in the price of travel affect the budget constraint, if at all? Why? b. When the price of travel rises, how will the household need to modify its consumption of travel and everything else in order to continue maximizing its utility? Why? Be sure to discuss both the substitution effect and the income effect of this price change. c. If the marginal utility of travel declines very slowly as more is consumed, is the quantity of travel demanded by the household likely to respond a lot or a little to a rise in the
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This note was uploaded on 09/26/2011 for the course 06E 001 taught by Professor Stuff during the Fall '10 term at University of Iowa.

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