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- Q 1 5. Refer to the following intertemporal budget constraint of a respective consumer: a. How would this budget constraint change if individual becomes more presented oriented (he discounts future heavily)? b. How would this budget constraint change if individual faces a borrowing constraint in second period?Sean budgets $30 per week for transportation. To get around, he can either drive his car (D) or take the city bus (B). The cost/trip for driving is $5 (PD) while the cost/trip for the bus is $2 (PB). Sean's Transportation Budget a. Driving 15 10 5 5 10 15 Bus Write down Sean's budget constraint given the information above. Graph the budget constraint as well using the graph above. Be sure to label it as BCI on the graph. b. Instead of paying per ride, Sean can also buy a weekly pass. The weekly pass costs a flat fee of $10 and is good for 7 rides. If Sean chooses to use the bus for any rides beyond those seven, he faces the normal price of $2/ride. Write down Sean's Budget constraint and graph it using the same figure above. Label as BC2. [Hint: Remember, Sean only pays the flat fee if he takes any trips, it does not apply if he only uses his car!]Question 9 ) Listen The negative slope of the budget line (or production possibilities curve) has a special meaning in economics. Which of the following does not indicate the negative slope correctly? 1) Consumers must make trade-offs in their consumption decisions. 2) There is an inverse relationship between the amount of one good and that of the other. 3) Positive slopes are always preferred to negative slopes. 4) To get more of one good, we must give up with less of the other good. Question 10 ( ) Listen Which of the following is a macroeconomic statement? 1) The price of farmland in the U.S. increased by 30 percent in 2011 to 2012. 2) The gross domestic product in the first quarter of 2014 decreased from the previous quarter. 3) General Motors' profits increased last year. 4) The productivity of steelworkers increased by 1 percent last year.
- Which of the following statements is correct? a. The demand for future goods is derived from consumers’ utility maximization problems over current and future consumption goods. b. It is the present value of future consumption goods that enters into the budget constraint of a consumer’s utility maximization problem over current and future consumption goods. c. The solution to a consumer’s utility maximization problem over current and future consumption goods can be interpreted as wealth not currently consumed that is invested to yield future consumption. d. All of the above.W 7 Ms. Bain maximizes 6. utility (given her budget constraint) at point X, skiing 2 days and spending 3 days horseback riding. Budget liņe Curve B U Y Curve A 1 Curve C V 1 2 3 4 5 6 7 Days of horseback riding per semester Part II Graph N 4. 3. Days of skiing per semesterLet's incorporate the labor-leisure trade-off and capital income taxes in the two-period model. Let c₁, c₂ be consumption in two periods, I the number of hours worked, Te Te the proportional taxes on consumption in 2 periods, s the saving rate, w the wage rate, b pension in the 2nd period, and 7, the tax on savings (capital income tax). The household's maximization problem in this case is: given by maxe₁,e2,8,1-1 log(c₁) + log (1-1)+5log (c₂) such that (1+T₂) C₁+8 = (1-7)wl and (1+T₂)C₂ = [1+r(1-Ts)]s+b, where measures how the household values leisure vis-a-vis consumption.
- 1. How does a consumer’s optimal choice of goods change if all prices and the consumer’s income double? (Hint: focus on the budget constraint) 2. Output is produced according to a production process given by: Q = 4LK, where L is the quantity of labor input and K is the quantity of capital input. If the price of K is $10 and the price of L is $5, then what is the cost-minimizing combination of K and L capable of producing 32 units of output?Which of the following two effects of a decrease in the tax rate on saving would raise savings? a. the income effect and the substitution effect b. the income effect but not the substitution effect c. the substitution effect but not the income effect d. neither the substitution effect nor the income effectSuppose that there are T periods to maximize over. Show that the intertemporal budget constraint is Ct+2 Yt+2 Yt+1 (1+r) (1+r)² (1 + r)² Ct + Ct+1 (1 + r) + 2+...+ Ct+T+1 (1+r)² \ T = Yt + + +...+ Yt+T+1 (1+r)
- Which consumption theory best explain the consumption behaviour of consumers in our economy4. The following data pertain to products A and B, both of which are purchased by Jay. Initially, the prices of the products and quantities consumed are: PA = $10; QA = 3; PB = $10; QB = 7 Jay has $100 to spend. After a reduction in price of B, the prices and quantities consumed are: PA = $10; QA = 2:5; PB = $5; QB = 15 Assume that Jay maximizes utility under both price conditions above. Also, note that if after the price reduction enough income were taken away from Jay to put him back on the original indifference curve, he would consume this combination of A and B: QA 1:5; QB = 9 Determine the change in consumption of good B due to the (1) the substitution effect and (2) the income effect using Hicks decomposition.Use the following graph to answer questions 2 and 3. Consumer Goods N (a) 7° (b) Capital Goods 2. Refer to the above production possibilities curves. Curve (a) is the current curve for the economy. Given production possibilities curve (a), point N suggests that the economy is: A) Attaining full employment but not full production B) Attaining full production but not full employment C) Using its available resources inefficiently D) Attaining both full employment and full production 3. Refer to the above production possibilities curves. Curve (a) is the current curve for the economy. A shift from curve (a) to curve (b) suggests: A) A shift from unemployment to full employment B) An improvement in capital goods technology but not in consumer goods technology C) An improvement in consumer goods technology but not in capital goods technology D) A change in the needs and wants of the society
