w10_ps3_econ100

# 10 a draw the budget constraint facing this consumer

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(C1) is \$1, but due to inflation the price of consumption next year (C2) will be \$1.10. a. Draw the budget constraint facing this consumer. Label the values of each intercept and state the slope of the budget line. b. Add an indifference curve to illustrate the consumer’s optimal choice of consumption today and consumption tomorrow. c. Show the income and substitution effects that would result from an increase in the interest rate. Carefully label all points on a graph (before and after an interest rate increase) and state the direction that C1 and C2 move for the income, substitution, and total effects of this change.

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5. Draw a simple indifference curve/budget constraint graph for two goods, food and energy. Put food on the vertical axis. Assume that the price of both food and energy increase, but the price of energy increases by more than the price of food (as a proportion of the initial prices). a. show the effect on consumption of food and energy of these price increases b. Draw a budget line and point of tangency that would describe what an ideal price index would be in this case. c. Now, on a separate graph, draw a budget line that would correspond to the concept behind a Laspeyers price index.
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