# PS5 - METU Department of Economics Econ 101 Introduction to...

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1/6 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 Fall 2011 PROBLEM SET 5 PART A- PROBLEMS 1. A consumer has an income of I = 300 TL per month and he wishes to spend all of it on two goods X and Y, whose prices are 15 TL and 20 TL, respectively. a) Express the budget line algebraically and draw the diagram. b) How will (i) and (ii) be affected by following situations (assume each time you start from initial budget constraint). i. Doubling of money income and doubling of all absolute prices. ii. Doubling of money income and doubling of price of X. iii. Doubling of price of Y, assuming all other things constant. iv. An increase in money income by 60 TL. 2. Th e following two tables illustrate Mehmet’s total utilities from watching movies in a theater ( T) and renting movies on DVD (V). Suppose that Mehmet has a monthly entertainment budget of 48 TL, each movie in a theater costs 12 TL, and each DVD rental is 6 TL. 0 0 12 0 0 6 1 90 12 1 110 6 2 170 12 2 195 6 3 245 12 3 265 6 4 305 12 4 330 6 5 355 12 5 385 6 6 400 12 6 430 6 7 435 12 7 460 6 a) Complete the tables. b) Does Mehmet’s response to both goods obey the law of diminishing marginal utility? Explain. c) Given his budget of 48 TL, what combination of theater and rental DVDs will maximize Mehmet’s level of satisfaction (i.e. at consumer equilibrium, how much of each good will be consumed)?

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2/6 3. Sup pose that there exist a branch of Çatı Restaurant in Kızılay. Assume that, in the METU campus, the re is no substitute of it, i.e. there is no Arkabahçe Restaurant, but there are much more substitutes in Kızılay. a) What is your expectation about the own price elasticities of these two Çatı Restaurants? Explain in words. b) Draw a typical consumer’s budget constraint and indifference curve one for Çatı Restaurants in Kızılay and another for Çatı Restaurants in the METU campus, i.e. draw two separate graphs. Then, obtain the demand curves (assume them to be linear) of these two restaurants by using these indifference curve s. (Consumer eats at Çatı or restaurant X in Kızılay and eats at Çatı or restaurant Y in the campus.) 4. Suppose that Mrs. Stewart allocates all her income on food and shelter. The price of food is 10 TL
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