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Exercise 2A.2 Demonstrate how my budget constraint would change if, on the way into
the store, I had
lost $300 of the $400 my wife had given to me. Does my opportunity cost of pants (in
terms of shirts) or
shirts (in terms of pants) change? What if prices of pants and shirts had doubled while I
was driving to the
store?
Exercise 2A.3 How would my budget constraint change if, instead of a 50% off coupon
for pants, my wife
had given me a 50% off coupon for shirts? What would the opportunity cost of pants (in
terms of shirts)
be?
Exercise 2A.4 Suppose that the two coupons analyzed above were for shirts instead of
pants. What would
the budget constraints look like?
2.1 Suppose my brother and I both go on a weeklong vacation in Cayman and, when we
arrive at the airport on
the island, we have to choose between either renting a car or taking a taxi to our hotel.
Renting a car involves a
fixed fee of $300 for the week, with each mile driven afterwards just costing 20 cents —
the price of gasoline per mile.
Taking a taxi involves no fixed fees, but each mile driven on the island during the week
now costs $1 per mile.
A: Suppose both my brother and I have brought $2,000 on our trip to spend on “miles
driven on the island”
and “other goods”. On a graph with miles driven on the horizontal and other consumption
on the vertical axis,
illustrate my budget constraint assuming I chose to rent a car and my brother’s budget
constraint assuming he
chose to take taxis.
(a) What is the opportunity cost for each mile driven that I faced?
(b) What is the opportunity cost for each mile driven that my brother faced?
B:
Derive the mathematical equations for my budget constraint and my brother’s budget
constraint, and relate
elements of these equations to your graphs in part A.
(a) Where in your budget equation for me can you locate the opportunity cost of a mile
driven?
(b) Where in your budget equation for my brother can you locate the opportunity cost of a
mile driven?
2.3 Suppose the only two goods in the world are peanut butter and jelly.
A: You have no exogenous income but you do own 5 jars of peanut butter and 2 jars of
jelly. The price of
peanut butter is $4 per jar, and the price of jelly is $6 per jar.
(a) On a graph with jars of peanut butter on the horizontal and jars of jelly on the vertical
axis, illustrate
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(b) How does your constraint change when the price of peanut butter doubles? How does
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This homework help was uploaded on 04/07/2008 for the course ECON 55 taught by Professor Rothstein during the Fall '07 term at Duke.
 Fall '07
 ROTHSTEIN
 Opportunity Cost

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