Problem Set 3

Problem Set 3 - Problem Set 3 Due: October 18, 2006...

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Problem Set 3 Due: October 18, 2006 Economics 231 Fall 2006 Professor John Conley Vanderbilt University 1. Midterm exams are usually offered within a week or so of each other. This means that you must decide how to allocate time to each of your courses. Suppose that you have both a Microeconomics, and an Econometrics exam this week. Suppose also that you have convex preferences over the scores you receive on these exams (that is, you would rather get two B's than an A, and a C.) Suppose you have 150 hours of time to study in total and it takes two hours of study to get each point on the Microeconomics midterm, but only one hour to get each point on the Econometrics exam. a. Write the equation of the budget constraint between points on the Microeconomics exam (M) and points on the Econometrics exam (E). Now sketch this budget constraint in a picture. Be sure to label your diagram. Draw in convex indifference curves and show your optimal choice. b. In economics, we sometimes like to make ridiculous assumptions in order to illustrate a point. Here is one. Suppose that your Microeconomics instructor suddenly becomes fantastically lucid, and the whole beautiful structure of economic reasoning suddenly becomes clear to you. Now you judge that it will only take you one hour of study to get each point on the Microeconomics exam. Write the equation for the new budget constraint. Now sketch the new budget constraint in same picture you used for part (a). show your new optimal choice.
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Problem Set 3 - Problem Set 3 Due: October 18, 2006...

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