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Problem Set 2

# Problem Set 2 - Due Problem Set 2 Economics 231 Fall 2006...

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Problem Set 2 Due: September 25, 2006 Economics 231 Fall 2006 Professor John Conley Vanderbilt University 1. The Banaku are a gentle race of space aliens living of the third planet of Nulnaks, a star in one of the nicer sections of the Crab Nebula (good golf facilities, and easy commute to the Nibar sector). Until recently, all the Banaku consumed was hava root and nedfrak pod juice. For the last ten years, they have been receiving television broadcasts from earth. For some reason all the Banaku have become obsessed with Bob Dole. Carved statues of the “Bobster”, as he is known on Nulnaks, are all the rage. The Banaku are a very egalitarian and homogenous race. Last year, each and every Banaku chose to spend his income of bundle consisting off 5 tons of hava root, 100 gallons of nedfrak juice, and 10 Bobsters. These were sold at the following prices: P hr =20, P nj =1, and P B =30. a. Suppose that this year, prices become P hr =15, P nj =2, and P B =25. Calculate the Laspeyres price index. By this measure, how much has the cost of living on Nulnaks changed over the last year? b. Suppose that at the original consumption bundle given above, Banaku’s were satiated in every direction. That is, giving a Banaku more of any one or two goods would leave them on the same indifference curve. However, giving them more of all goods would make them better off. Put another way, these goods are “perfect complements” in these ratios and preferences are only weekly monotone.

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