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Problem Set 1

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15 views

Problem Set 1

Uploaded by

Efe Serhat Saatçı
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem Set 1

ECON 201 - Microeconomics


Fall 2024

Problem 1. Suppose you have an income of $50 to spend on two commodities. Let the
per-unit price of these commodities be P1 = $2 and P2 = $5.
a) Write down your budget equation.
b) Suppose you spend all your income on commodity 1. What is the maximum amount
of commodity 1 you can buy?
c) Repeat part b) for commodity 2.
d) What is the opportunity cost, in terms of units of commodity 1, of an additional unit
of commodity 2?
e) Draw your budget constraint.
f) Suppose your income increases to $60. Does your answer to part d) change? Draw
your new budget constraint.
g) Suppose now your income is $50 but P2 increased to $10. Does your answer to part d)
change? Draw your new budget constraint.
h) Consider the initial income and prices. What is the opportunity cost, in terms of
units of commodity 2, of an additional unit of commodity 1? Can you identify the
opportunity cost from the budget constraint you drew on part e)?

Problem 2. Gimme Coffee charges $3/lb for the first 10 lbs you purchase of their special
coffee blend each week and $2/lb for every pound you buy thereafter. Suppose your weekly
income is $120.
a) Draw your budget constraint for coffee and the composite good (i.e., all other goods
you consume other than coffee).
b) Draw your budget constraint assuming that your weekly income has increased to $150.
c) Assume again that your your weekly income is $120. Suppose now that Gimme Coffee
charges $4/lb after 15lbs of coffee purchase. Draw your budget constraint.

Problem 3. Cornelius is a graduate student at the Ohio State University and has $500 to
spend on food and clothing. Suppose PF = $1 per unit and PC = $2 per unit.

1
a) Draw Cornelius’ budget constraint.

b) Suppose the OSU gives Cornelius 50 coupons that can be used to buy food. One
coupon is worth 1 unit of food and coupons are divisible. Assume that coupons are not
transferable, so that Cornelius cannot sell them for cash or clothing. Draw Cornelius’
new budget constraint.

c) Suppose now that each coupon can be sold at a price of $0.5. How does introducing
the market for coupons alter Cornelius’ budget constraint.

d) An economics professor at the OSU argues that the market for coupons should be
prohibited because it does not make the students better off. Evaluate the professor’s
claim.

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