Assignment
1. Show a consumer's budget line for ham and cheese if the price of ham is $4, price of cheese is $5, and he has $100 of income. Remember to label your axes. Write down exact values for the endpoints and slope of the budget line.
2. Answer the following True/False questions that refer to the same situation as Problem #1 by circling the correct answer.
TRUE FALSE The consumer could afford to buy 25 units of cheese.
TRUE FALSE The consumer could afford to buy 25 units of ham.
TRUE FALSE The consumer could afford to buy 10 units of ham and 10 units of cheese.
TRUE FALSE If the consumer bought 10 units of ham and 10 units of cheese, he would be correctly solving his consumer problem.
TRUE FALSE If the price of ham increased, the maximum amount of cheese the consumer could afford would be unchanged.
TRUE FALSE If the price of ham increased and the consumer continued to buy at least 1 unit of ham, the amount of cheese the consumer could afford would be unchanged.
3. If a demand curve is perfectly elastic and consumers buy 2,000 units of the good at a price of $8, how many units will be purchased if the price increases to $9?
4. If a demand curve is perfectly inelastic and consumers buy 2,000 units of the good at a price of $8, how many units will be purchased if the price increases to $9?
5. Explain why allowing the producer to choose his inputs (amount of labor, capital, land, etc) allows him to affect the shape/size of the PPF, which we previously had assumed was his immutable production limitation.
6. Jason's income elasticity of demand for BMWs is 5. If he owns two BMWs when he makes $800,000, how much money would he have to make in order to buy one more BMW?
IED =
Qf =
Qi =
Ii =
If = (You need to solve for this one, the rest are given information)
7. Show the derivation of a demand curve from the underlying fundamentals of consumers solving their problem. In other words, show a budget constraint and indifference curve that shows a consumer solving his problem. Then change the price of good 1 (either decrease or increase it) and show the new amount of good 1 consumed (assume the indifference curves are basically parallel and behave "nicely"). Change the price one more time (in the same direction) and show the new amount of good 1 consumed. Plot your three (Q, P) points on a separate graph to reveal your demand curve.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.