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# P art b 80 do all questions in this s ection

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P ART B: (80) DO ALL QUESTIONS IN THIS S ection.

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ECONOMICS 203 (S01) PAGE 4 of 5 2. (30) Jason has preferences defined over novels (good x) and DVD’s (good y) described by the utility function 1/2 1/2 ( , ) U x y x y = . He has income of \$1200; novels cost \$10 each, while DVD’s are priced at \$15. a) (3) Sketch his budget constraint. b) (7) What two conditions are satisfied at Jason’s optimal consumption bundle? What is this bundle? (question continued on other side of page) Suppose the price of DVD’s increases to \$20, while the price of novels is unchanged. c) (3) In your initial diagram, draw his new budget constraint, and identify his new optimal bundle. d) (5) How does Jason’s MRS of novels for DVD’s compare at your answers to (b) and (c)? e) (8) On your diagram, identify the income and substitution effects of the change in the price of DVD’s on the quantity of DVD’s Jason purchases. Briefly explain what each effect measures. f) (4) Which effect is responsible for the change in the MRS? Why? 3. (35) A San Francisco supervisor called for a tax to be imposed on grocery store bags, and collected from the stores. He said he never intended that this surcharge be passed on to consumers. With the aid of diagrams, discuss the conditions on cost functions and market structure under which some or all of this surcharge would be passed on. 4. (15) Consider an exchange economy with two agents, Arnold and Ben, and two goods, X and Y. Arnold's utility function is ( , ) A A A A A U x y x y = , while Ben's utility function is ( , ) 3 B B B B B U x y x y = + ; subscripts denote the individual's own consumption bundle. Suppose Arnold's initial endowment is ( , ) (1,7) A A x y = , and Ben's is ( , ) (7,1) B B x y = a) (3) Illustrate this economy in an Edgeworth box. Label the endowment point E. b) (5) What is meant by "the contract curve"? Sketch it in your diagram.
ECONOMICS 203 (S01) PAGE 5 of 5 c) (7) Given the initial endowments, would it be possible for Arnold and Ben to trade to the point where ( , ) (2,3) A A x y = ? Explain why or why not. THE END
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