ECON 301, Intermediate Microeconomics
Fall 2024
Problem Set 1: Budget Constraints
For all problems, draw the budget constraint for period 1 with a dashed line. Draw in the same graph the budget constraint corresponding to period 2 with a solid line. Indicate (and label) the value of both intercepts and the slope.
Question 1: Let Px = 10 , Py = 20, and income=100 in period 1.
(a) Period 2: There is a per-unit tax of t=$2 for every unit of X. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the tax
(b)Can you afford bundle (X,Y)=(2,4) in period 1? What about in period 2?
Question 2: Let Px = 10 , Py = 20, and income=100 in period 1.
Period 2: As part of a marke\ng strategy, the company that produces good X gives consumers a one-\me rebate of $10 if you consume X≥ 5. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the rebate.
Question 3: Let Px = 10 , Py = 20, and income=100 in period 1.
Period 2: The local government mandates a 20% tax for every unit of X≥ 5, as an incen\ve for people to keep consump\on to small quan\\es. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the tax.
Question 4: Let Px = 10 , Py = 20, and income=100 in period 1.
Period 2: The local government implements a subsidy of 20% for every unit of good Y as part of an incen\ve to get people to consume more produce (good Y). Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the subsidy.
Question 5: Let Px = 10 , Py = 20, and income=100 in period 1.
Period 2: The local government implements a subsidy of 20% for every unit of Y≥ 3.Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the subsidy.
Question 6: Let Px = 1 , Py = 1, and income=100 in period 1. X=Food and Y=other goods in period 1.
Period 2: There is a federal program (a variant of the food stamps program) that gives people a one \me $40 voucher that can only be used towards food. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) this variant of the food stamp program.
Question 7 (Follow-up to ques7on 6) Would you be be_er off receiving $40 cash instead of the $40 food voucher? Why?
Question 8: Let Px = 10 , Py = 20, and income=100 in period 1.
Period 2: Due to infla\on, both prices increase by 10%. Your employer increases your income by 5%. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) changes in prices and income attributed to infla\on.
Question 9 (Follow-up to ques7on 8): Is anyone be_er off with the scenario in period 2 aVer the income increase, taken as a given the price increase of 10% for both goods?
Question 10: Let Px = 10 , Py = 20, and income=100 in period 1.
Period 2: Due to infla\on, Px increases by 10%, Py increases by 5%, and employers adjust income with a 10% increase. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the changes in prices and income a_ributed to infla\on.
Question 11: Let Px = 10 , Py = 20, and income=100 in period 1. Let Y=Benadryl.
Period 2: Due to a government interven\on, you can only buy up to 2 units of Benadryl. If you want more, you can buy it from the black market where they sell it for $30. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) the policy.
Question 12: Let Px = 1 , Py = 1, and income=300 in period 1. Let X be food and Y be other goods.
Period 2: The food stamp program consisted of being able to buy a food coupon with the value of $153 for the price of $83 and you can only buy that once. If you want to buy more than $153 worth of food, you must pay regular price. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) this variant of the food stamp program.
Question 13: Let Px = 1 , Py = 1, and income=300 in period 1. Let X be food and Y be other goods.
Period 2: Another version of a food stamp program consisted of providing low-income households with $200 worth of food for free. Draw the budget constraint labeling both intercepts and labeling the slope under both scenarios: (i) before (dashed line) and (ii)aVer (solid line) this variant of the food stamp program.