Microeconomics (Fall 2011) Problem Set 3 Due in class (Monday, October 3) Please submit your answers on a separate sh...

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Microeconomics P Set 3 - In light of the Great Recession

April 14, 2018

Microeconomics (Fall 2011)

Problem Set 3

Due in class (Monday, October 3)

Please submit your answers on a separate sheet(s) of paper with your name, the name of your recitation teacher, and the day and time of your recitation.

1. In light of the Great Recession, suppose that President Obama wants to increase the ability of families to pay for college education. Would you a $5000 income tax rebate differ from a $5000 tax credit for tuition reimbursement? Explain.

2. Gary spends all his money on root beer and beef jerky. When the price of beef jerky decreases, he buys more beef jerky.

a. Does the substitution effect cause him to buy more or less beef jerky? Explain. (If the direction of the effect is ambiguous, say so).

b. Does the income effect cause him to buy more or less beef jerky? Explain. (If the direction of the effect is ambiguous, say so).

3. Sylvester spends all his money on baseball and hockey. Baseball is an inferior good for Sylvester. Does he view hockey as an inferior or a normal good? Why? In a diagram, show a possible income-consumption curve for Sylvester?

4. Doris faces prices for peanut butter and jelly of $1 each. Consumption of the two commodities at various weekly income levels are shown below.

a. Draw the Engel curves for peanut butter and jelly.

Income

Peanut Butter

Jelly

$15

7

15

20

13

21

25

20

30

b. What is the income elasticity of peanut butter as for Doris as income increases from $15 to $20?

4. Rohit views the New Yorker and morning coffee as perfect complements. In his first year in NYC, he picks an optimal bundle of the New Yorker and morning coffee, E1. In his second year, inflation occurs, the prices of the New Yorker and morning coffee change by different amounts, and he receives a cost of living adjustment (COLA) from NYU based on the consumer price index (CPI) for these two goods. After the price changes and he receives the COLA, his new optimal bundle is E2. Show the two points, E1 and E2 in a figure. Is he better off, worse off, or equally well off at E2 compared to E1? Explain.

5. Suppose that Juan’s demand for cigarettes is described by the equation Q=10 - 0.2p. If each pack of cigarettes costs $5, how many packs will Juan buy? What is the price elasticity of demand for cigarettes at this point? Is demand elastic or inelastic? Explain your answer.










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