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# PS5-Answers - METU Department of Economics Econ 101 03 Fall...

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1 METU Department of Economics Econ 101 Sections 01, 02, 03 Fall 2009 PROBLEM SET # 5 with ANSWERS (CHAPTER 6) PART A- PROBLEMS 1. Suppose that Omer lives in a world with only two goods, apples and bananas. Omer’s income each month is 50 TL. Apples cost 2 TL per unit, and bananas cost 5 TL per unit. a. Graph Omer’s budget constraint with apples on the vertical axis, and shade the area representing all the bundles of apples and bananas that Omer can afford. Express the budget line equation and calculate its slope. b. Suppose that the price of apple went up to 5 YTL per pound while all the other things remained unchanged, what would happen to his budget constraint? Show graphically and algebraically. Comparing with the original budget constraint does the slope change or not? c. Suppose that Omer’s income doubles while prices remained unchanged from their original level. Show graphically and algebraically what happens to Omer’s budget constraint. Comparing with the original budget constraint does the slope change or not? d. Now suppose that Omer’s income doubles, but that prices also double. What would happen to his budget constraint? Comparing with the original budget constraint does the slope change or not? e. Suppose that prices of apple and banana doubles while Omer’s income remained unchanged from his original level. Draw Omer’s new budget line.

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2 Answer a. Banana Apple 10 25 b. Banana Apple 10 10 c. Banana Apple 20 50 Budget line eq : 2A + 5B = 50 where B denotes quantity of bananas consumed and A denotes quantity of apples consumed. Slope: - (P B / P A ) = - (5/2) New Budget Line: 5A + 5B = 50 New Slope: -1 New Budget Line: 2A + 5B = 100 New Slope: - (5/2) Budget line shifted out.
3 d. Banana Apple 10 25 e. 5 Banana 12.5 Apple Budget line : 4A + 10B = 100 OR 2A + 5B = 50 Slope: - (P B / P A ) = - (5/2) Budget line does not change Budget Line: 4A + 10B = 50 Slope: - (P B / P A ) = - (5/2) Bugdet line shifted inwards.

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4 2. The following two tables illustrate Ezgi’s total utilities from spending on earrings (e) and bags (b). Suppose that Ezgi has a monthly budget of 36000 YTL, each earrings cost 6000 TL, and each bag costs 3000 TL. Q(e) TU(e) MU(e) MU(e)/P(e) 0 0 1 200 2 290 3 370 4 440 5 500 6 550 7 590 a. Fill in the figures for marginal utility and marginal utility per TL for both earrings and bags.
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PS5-Answers - METU Department of Economics Econ 101 03 Fall...

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