Project #54037 - Economics

Consumer theory I


Answer the following questions using this week’s required readings (see last lecture slide) and any additional material necessary.


1.     Suppose that a consumer’s income is $10, which she may split between goods x and y. The price of x is $1.00 per unit and that of good y is $2.00 per unit. Draw the budget line with x on the horizontal and y on the vertical axis.

a.    What is the slope of the budget line?

b.    What is the vertical intercept of the budget line?

c.     What is the opportunity cost of x in terms of y?

d.    What happens to slope and vertical intercept if the price of x doubles?


2.     Some restaurants have all-you-can-eat offers. Compare the budget lines of a consumer who pays $50 for an all-you-can-eat offer to a consumer who pays price p1 for food. (Hint: Assume the other good consumed is a composite good.)


3.     Quality Coffee has a loyalty card which provides consumers with one free coffee for every twelve coffees they have purchased. Draw the budget line assuming m is the consumer’s income, pc is the cost of coffee and py is the cost of all other goods. 

a.    Under which conditions will consumers benefit from the loyalty programme? 

b.    Will anyone be worse off?   


4.     A consumer likes to purchase round trips between the cities of A and B and other goods out of her income of £ 10 000. Fortunately, Flyaway Airways provides air service and has a frequent flyer program. A round trip between the two cities normally costs £ 500, but any customer who makes more than 10 round trips a year gets to make additional trips during the year for only £ 200 per round trip.

a.    On a graph with round trips on the horizontal axis and "other goods" on the vertical axis, draw the consumer’s budget line.

b.    Draw a set of indifference curve that illustrates why the consumer might be better off with the frequent flyer programme.

c.     Draw a set of indifference curves that illustrates why he or she might be worse off.


5.     Suppose that a budget equation is given by p1x1+p2x2=m. The government decides to impose a lump sum tax of u, a quantity tax on good 1 of t, and a quantity subsidy on good 2 of s. What is the formula for the new budget line?


6.     Chocolate and ice cream are the only two goods you consume and perfect substitutes for you. What is your total demand for chocolate and/or ice cream? Express your demand using m (your budget) and the price of chocolate and ice cream (pc, pi).


7.     Draw indifference curves (over cricket and football watched on TV) to represent the following description of consumer preferences:

a.    I don’t care whether I watch football or cricket. I just like to watch sports.

b.    I only watch football. Cricket is not a sport to me.

c.     I don’t like to watch football. I can’t stand the hooligans. I don’t care for cricket either, it is too boring.

d.    I like to watch a little football and a little of cricket. While I like sports, I need variety.

Under what conditions is u a monotonic transformation of v if u=v2?

Subject Business
Due By (Pacific Time) 01/19/2015 02:00 pm
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