Consumer Equilibrium

1. (5 points) See file uploaded for full paper information with Graphs. If have any questions feel free to ask.

 

A consumer is at equilibrium at point A in the accompanying figure. The price of good X is $20.

(a) What is the price of good Y?

(b) What is the total income (expenditure) of the consumer?

(c) At point A, how many units of Good X is the consumer purchasing?

(d) If the consumer spends his entire income on good X, how much of X will he consume?

(e) Suppose that the budget line changes so that the consumer is at a new equilibrium at point

B. What change could have led to the rotation of the budget line in the manner shown above? Please explain.

2. (5 points) A stockholder named Sue must cast a vote for chair of the board. Sue prefers Mr. Lee to Ms. Doe, Ms. Doe to Mr. James, and Mr. James to Mr. Lee.

(a) Are Sue’s preferences consistent with the transitive property? Please explain.
(b) If all three candidates, Mr. Lee, Ms. Doe, and Mr. James are on the ballot at the same time,

who would Sue vote for? Please explain.

 

3. (5 points) In the above figure a consumer is initially at equilibrium at point C. The consumer’s income is $400, and the budget line through point C is given by $400 = 100X + 200Y. When the consumer is given a $100 gift certificate that is good only for product X, she moves to a new equilibrium point at point D.

(a) What are the prices of X and Y?

(b) How many units of product X will be purchased at point B? Please explain.

(c) How many units of Product X will be purchased at point F? Please explain.

(d) Please rank the bundles of goods A, B, C, D, from least preferred to most preferred (from

lowest utility or satisfaction to highest utility of satisfaction).

4. (5 points) Suppose an individual’s marginal rate of substitution is three slices of pizza for one beer at the present bundle of beer and pizza she is consuming. If the price of beer is $1.00 and the price of a slice of pizza is $1.50, is the consumer maximizing her welfare? If not, how should she change her consumption?

5. (5 points) Suppose a consumer derives satisfaction from consuming hamburgers and hot dogs. Graph the budget line of the consumer under the assumption that he is offered a “buy two, get one free” deal for hot dogs (limit one free hot dog). Please label and make a graph.