Econ 205 Elasticity Problems

# Econ 205 Elasticity Problems - Practice questions from...

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Practice questions from former midterms: Part II: Answer the following on the paper provided Question 1: Suppose that Caitlyn has an after tax income of \$510 per week and that she must spend it all on GAS or Rent. (i) Draw the following graph: (2 marks) If gas is \$1.75 per litre and rent is \$25 per day, draw her budget line on a graph where the amount of gas is measured along the vertical axis and the amount of rent is measured along the horizontal axis. (ii)Determine the equation for the budget line. (2 Marks) Question 2: Frank has budgeted a total of \$51 to spend on two goods, bagels and cream cheese. He likes to consume one bagel in combination with a unit of cream cheese. Any unit of bagel that he cannot consume in combination with a unit of cream cheese is useless. Similarly, any unit of cream cheese that he cannot consume in combination with a bagel is useless. If the price of a bagel is \$2.50 and the price of a unit of cheese is \$1.75, how many units of each good will he purchase? Draw Frank’s indifference curve at the point of consumption.

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