C 4in the diagram for a sketch freds budget set if

Info icon This preview shows pages 3–4. Sign up to view the full content.

View Full Document Right Arrow Icon
c) (4)In the diagram for (a), sketch Fred’s budget set if the tax rebate is eliminated. Carefully explain why the budget set has changed. Ans: Vertical intercept declines, all else stays the same. Why? The effective price of a night in a hotel has risen, while that of a show is unchanged. Change in budget set depends on how much fred spends on hotels. d) (5) How will Fred’s optimal bundle on the new budget set differ from that chosen in (2)? Why? Ans: Optimal bundle will be inside original budget line, on new BL where IC is tangent to new, flatter BL. New MRS of nights in hotel for shows is lower, since opportunity cost of shows has fallen as price of hotels increases relative to that of shows. Fred must decrease purchases of at least one good, possibly both. e) (3) Given your analysis, would hotel owners and show producers agree that the elimination of the rebate is a good (or bad) idea? Why or why not? Ans: depends on how preferences are drawn. If quantities of both goods decline, producers of both good would agree. If quantity of one declines and other increases, then they will disagree - I expect individuals to answer this based on their own diagram. f (3) Would you expect everyone in the class to give the same answer to (5)? Why or why not? Ans : no – the theory does not pin down exactly what will happen – since preferences can differ, individuals in the class may have drawn IC’s differently. g)( 3) How would your answers to (e) and (f) change if shows and nights in a hotel room were perfect complements for Fred? Ans : if perfect complements, would always want to consume hotel rooms and shows in the same proportion – so a removal of the rebate would decrease quantities of both, and hence revenues of producers of both – so they would agree. Economics 203 (F01), 2006; midterm 1 Page 3 of 5
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Name: Welling, answer key ______________________ Student number _________________________________ Lab LF0___both_ __ Economics 203 (F01), 2006; midterm 1 Page 4 of 5
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern