Problem 1. Haya consumes two beverages: San Pellegrino (i.e. fancy) water, and tap water. She has an income of $100 to spend on these goods per month. The price of tap water is $0.30 per glass, and the price of fancy water is $10 per glass.
Haya tells you that for her, fancy and tap water are neither perfect substitutes nor perfect complements, and that given her budget and these prices, her best affordable consumption bundle is 4 glasses of San Pellegrino and 200 glasses of tap water. (She gets very thirsty.)
Now suppose the price of fancy water rises to $20 per glass, and the price of tap water falls to $0.10 per glass. Is Haya better off, worse off, or indifferent as a result of the price change? Why?
Problem 2. Alanoud likes hamburgers and pizza. At her current level of consumption, her marginal rate of substitution of hamburgers for slices of pizza is 2. Explain what this means. If she increases her consumption of hamburgers, will her MRS (relinquishing hamburgers for additional pizza) increase or decrease?
Problem 3. One of the 2 points below (A or B) has an MRS (relinquishing Y for additional X) of -6 and the other has an MRS (relinquishing Y for additional X) of -2. Which is which? Explain.
Problem 4. A consumer’s income is $150 per week. Food costs $5 per meal and dvd's cost $10 each. Graph her budget constraint. If she spends all her income on these 2 goods, and eats 20 meals per week, how many DVDs can she afford?
Problem 5. Consider the consumer below. She consumes 10X and 5Y. What will be the effect on her utility of imposing a rationing system in which the consumer is only allowed to buy 5X? (Remember to show the changes on the graph, as well as explaining in words.)
Problem 6. Below is a budget constraint for Ibrahim, who is a vegetarian. He consumes no meat because it gives him no utility. Draw an indifference curve for Ibrahim, showing where he will consume. Will the usual consumer equilibrium condition hold at her utility maximization point?
Problem 7. Amna sees no difference between Coke and Pepsi. They are both equally satisfying to her. (Coke and Pepsi are "perfect substitutes.") Draw one of her indifference curves. Where will she consume:
if P(Coke)/P(Pepsi) = 1/2?
if P(Coke)/P(Pepsi) = 1?
if P(Coke)/P(Pepsi) = 2?
Problem 8. Illustrate the effects on a consumer of a subsidy on education using indifference curves and budget constraints. Also illustrate the effects on a consumer's purchases of education of an unrestricted cash payment to her. (Hint: Use "education" and "all other goods" as the two goods she spends her income on.)
Problem 9. Since 1900 in the US, family income has greatly increased (even after accounting for inflation), but the average number of children per family has decreased. Illustrate each of the following possibilities using budget constraints and indifference curves.
(a) Children are an inferior good.
(b) Children are not an inferior good, but it has become more expensive to bear and raise them, relative to other goods.
(c) Children are not an inferior good, and they have not become relatively more expensive. What has happened is that tastes have changed: couples want smaller families today.
Problem 10. Assume that there are 1,000 identical consumers in the market for good X, each with the same income and the same preferences. When the price of X is $50, the typical consumer is willing and able to purchase 20 units of X. When the price of X is $40, the typical consumer is willing and able to purchase 25 units of X.
(a) Construct the market demand curve (assume it is a straight line) and calculate the loss of consumer surplus if the price increases from $40 to $50.
(b) Show the effect of an increase in price from $40 to $50 on a typical consumer, i.e., illustrate the income and substitution effects.
Problem 11. True or False (and explain): If people spend all their income they are on a budget line; if they save, they are not on a budget line.
Problem 12. The money price of long-distance travel by bus is much less than that by airplane. Yet people travel by airplane -- is this a case of economic irrationality? Explain.
Problem 13. True or False (and explain): If two men with identical preferences and incomes choose different consumption bundles, one of them must be irrational.
Problem 14. True or False (and explain): When the price of dates falls, my preferences shift towards dates.