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# A 4 sketch elisabeths budget set use at least ½ page

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a) (4) Sketch Elisabeth’s budget set; use at least ½ page for your diagram, and put x on the horizontal axis. What is the slope of her budget line? Elisabeth’s utility function over the two goods is given by U(x,y)=xy. Given the budget set above, she purchases 25 units of good x and 12.5 units of good y . b) (5) In the diagram above, label this bundle as B and sketch Elisabeth’s indifference curve through it. What conditions are satisfied at this bundle?

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ECONOMICS 203 (S01) PAGE 2 of 5 continued on page 2 Suppose that Elisabeth is a utility-maximizer. Let the unit price of good y fall to \$2, with the price of good x and Elisabeth’s income constant. c) (3) In the diagram in part (a), sketch Elisabeth’s new budget set. d) (4) What bundle will Elisabeth choose to purchase now? Briefly explain why – verbally or algebraically; identify this bundle in your diagram as point C . e) (3) How much of good y must Elisabeth receive to be willing to give up a unit of good x at bundle C ? Explain your reasoning. f) (6) In a new diagram (also at least ½ page), identify the income and substitution effects of the price change on good x. g) (5) Are goods x and y inferior goods for Elisabeth? How do you know this? 3.(40)The market demand curve for frozen yogurt cones in Cochrane is given by 200 2 Q p = - where Q is total number of cones per week and p is the price per cone. a) (2) Sketch this demand curve, using at least 1/2 page for your diagram. Frozen yogurt cones are produced with a fairly simple technology, so total cost for a firm producing q cones per week is ( ) 10 2 C q q = + . b) (4) Does this equation describe short run or long run costs? Explain your reasoning. c) (3) Derive the average and marginal cost curves for this firm, and sketch them in a separate diagram. In the summer of 2004 there was one firm producing frozen yogurt cones in Cochrane. d) (8) Solve for the market equilibrium in 2004. Identify this equilibrium in your diagram in part (a); label it point M. e) (8) In your diagram in part (a), identify the consumer and producer surplus in this market. What is meant by these terms?
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