Lecture 3 Practice Questions
From Frank text: In-chapter exercises 3.1-3.6, 5.1-5.3.
Additional questions:
1. (a) Herve has an income of $1200. He spends his entire income on escargot and champagne. The price of escargot is $50/pound. The price of champagne is $100/bottle. Draw Herve's budget constraint. (b) Suppose the price of escargot rises to $80/pound. Draw Herve's new budget constraint.
2. Explain the economic meaning of (a) the vertical intercept of the budget constraint, and (b) the slope of the budget constraint.
3. Herb buys only two products: porno mags ($6 each) and bottles of Rogaine ($9 each). His total budget is $72. Let x stand for porno mags and y stand for Rogaine bottles. (a) State Herb’s budget constraint algebraically, and then graph it. (b) Suppose Herb’s income increases to $108. State his new budget constraint algebraically, and then graph it.
4. Skeeter has an income of $400, which he spends on only two goods: guns and ammunition. The price of a gun is $100, and the price of a box of ammunition is $20. But the gun shop will give Skeeter one box of ammunition free with every gun Skeeter buys. Graph Skeeter’s budget constraint. Hint: Start by plotting the point where Skeeter spends all $400 on guns. Notice that he will get some ammunition free, so this point will not be on one of the axes.
5. Lilah has an income of $50 that she spends on food alone. She only likes two kinds of food: Pizza Hut pizzas and McDonald’s Happy Meals. The price of a Happy Meal is $5. Pizza Hut has a special deal: your first pizza costs $10, but every pizza after that costs only $5. Using this information, graph Lilah’s budget constraint. Hint: Plot the point where Lilah spends all $50 on Happy Meals. Then plot the point where Lilah spends all $50 on Happy Meals. Then plot the point where Lilah buys only one pizza, and spends the rest of her money on Happy Meals.
6. What assumption about preferences does each of the following statements violate? (a) "I prefer rock to scissors, scissors to paper, and paper to rock." (b) "I don't care for chocolate, and I don't like peanut butter, either. But I love Reese's peanut butter cups!" (c) "Pens and pencils are the same to me. No matter how many pens I have, I'll always trade a pencil for a pen."
7. Elvis considers peanut butter and bananas to be perfect complements: he must have four bananas for every jar of peanut butter. The price of a banana is $0.50 and the price of a jar of peanut butter is $3. Elvis has an income of $25 that he spends only on peanut butter and bananas. Find the amount of peanut butter and bananas Elvis should buy to maximize his utility. No graph is necessary.
8. Albert has $120 to spend on clothes, and he will only buy boxer shorts and V-neck sweaters. A pair of boxer shorts costs $10, and a V-neck sweater costs $30.
a) Draw Albert's budget constraint.
b) Albert starts by buying 3 pairs of boxer shorts. Then he discovers that the store won't let you return undergarments (because nobody will buy underwear that someone else has worn). Draw Albert's new budget constraint after buying the boxer shorts. Hint: After having bought 3 pairs of boxer shorts, Albert's remaining income is $90.