339 assignment 1 with answers
ECON 339, September 2013
Assignment 1
Economics 339 (A01) 2013
Assignment 1
L. Welling
September 18, 2013
Due: September 30, 2013
Total value: 25 marks
Notes:
1. Assignment is due by 4:30 pm on September 30. It can be handed in be in class before then, or dropped into the assignment box for 339 by that time. Students are encouraged to work together on assignments, but must write up answers individually.
2. Please use at least one-half page for any diagram required. Marks will be deducted if diagrams are not labeled and explained.
1. (15) Rajan spends all his money on only two goods, bananas and scones.
Bananas cost $0.60/kg, and scones cost $0.50 each.
a) (1) Sketch Rajan's budget constraint if he has an income of
$10.00/day. (Put bananas on the horizontal axis.)
Ans:
horizontal intercept = $10.00/$0.60=50/3; vertical intercept = $10/00/$0.50 = 20 must label axes ( deduct ½ mark if axes not labeled).
Rajan has well-behaved preferences, and his optimal bundle contains 10 scones.
b) (2) Illustrate his optimal bundle in your diagram for (a); label it A. Why is this choice optimal? What conditions does it satisfy?
Ans: This bundle maximizes Rajan’s utility, because it is on the highest indifference curve he can attain given his income and the prices he faces. The two conditions are i) it is on his budget line, so all his money is spent, and ii) at this bundle his marginal rate of substitution is equal to the price ratio.
c) (2) How many kg of bananas does he buy? (Show how you derived this number.)
Ans: if he buys 10 scones, at 50 cents each, he spends $5 on scones. Since he spends all his income, he must spend $5 on bananas as well. Bananas cost
60cents/kg, so he buys $5.00/0.60 = 25/3 = 8 and 1/3 kg of bananas.
d) (2) Suppose the price of bananas doubles. In your diagram for (a), identify the total effect of this price increase on Rajan's optimal choice.
(Label his new optimal bundle G.)
ECON 339, September 2013
Assignment 1
Economics 339 (A01) 2013
Assignment 1
L. Welling
September 18, 2013
Due: September 30, 2013
Total value: 25 marks
Notes:
1. Assignment is due by 4:30 pm on September 30. It can be handed in be in class before then, or dropped into the assignment box for 339 by that time. Students are encouraged to work together on assignments, but must write up answers individually.
2. Please use at least one-half page for any diagram required. Marks will be deducted if diagrams are not labeled and explained.
1. (15) Rajan spends all his money on only two goods, bananas and scones.
Bananas cost $0.60/kg, and scones cost $0.50 each.
a) (1) Sketch Rajan's budget constraint if he has an income of
$10.00/day. (Put bananas on the horizontal axis.)
Ans:
horizontal intercept = $10.00/$0.60=50/3; vertical intercept = $10/00/$0.50 = 20 must label axes ( deduct ½ mark if axes not labeled).
Rajan has well-behaved preferences, and his optimal bundle contains 10 scones.
b) (2) Illustrate his optimal bundle in your diagram for (a); label it A. Why is this choice optimal? What conditions does it satisfy?
Ans: This bundle maximizes Rajan’s utility, because it is on the highest indifference curve he can attain given his income and the prices he faces. The two conditions are i) it is on his budget line, so all his money is spent, and ii) at this bundle his marginal rate of substitution is equal to the price ratio.
c) (2) How many kg of bananas does he buy? (Show how you derived this number.)
Ans: if he buys 10 scones, at 50 cents each, he spends $5 on scones. Since he spends all his income, he must spend $5 on bananas as well. Bananas cost
60cents/kg, so he buys $5.00/0.60 = 25/3 = 8 and 1/3 kg of bananas.
d) (2) Suppose the price of bananas doubles. In your diagram for (a), identify the total effect of this price increase on Rajan's optimal choice.
(Label his new optimal bundle G.)
ECON 339, September 2013