Exam 2: A Consumers Economic Circumstances

A consumer has $1,000 a week to spend on renting square feet of housing (at a price of $5 per square foot) and eating out (at a price of $20 per meal).With square feet of housing on the horizontal and meals on the vertical axis, what is the vertical intercept and what is the slope of this consumer's budget constraint?

The budget line on a graph represents choices which exhaust all resources.

If a consumer's fixed income increases, his opportunity cost also increases.

If all consumers are price-takers facing the same prices, then all choice sets are the same.

Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by $100.Model TVs as x₁ and all other goods as a composite good x₂. a.For a consumer with income I, write down an equation for the before-tax budget line. b.Write down the after-tax budget line equation. c.Suppose you know the bundle on the after-tax budget that is chosen by the consumer contains 3 TVs.How much in tax revenue is the government raising from this consumer? d.If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but raises the same amount of revenue from the consumer, how would this change the consumer's budget line equation?

When the good on the horizontal axis is a composite good, the slope of the budget constraint is minus the price of the good on the vertical axis.

In a graph of choice sets, a price change affects the ratio but does not affect the budget line.

Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.How could this have happened if the price of the good on the horizontal axis did not change?

Suppose the government wants to discourage excessive consumption of alcohol.It therefore imposes a per-unit tax on alcohol that increases as more alcohol is bought by a consumer at a store.What happens to a consumer's budget at a liquor store (with liters of alcohol on the horizontal axis and a composite good on the vertical) --- assuming the consumer takes only one trip to the store.

If all consumers are price-takers facing the same prices, then their budget lines will all have the same slope.

When the good on the vertical axis is a composite good, the slope of the budget line is equal to minus the price of the good on the horizontal axis.

Regardless of which consumption bundle in her choice set a consumer chooses, she will spend all of her available income.

A consumer has $1,000 a week to spend on renting square feet of housing x₁ (at a price of $5 per square foot) and eating out meals x₂ (at a price of $20 per meal).Derive the budget line equation and find the opportunity cost of housing in terms of meals in your equation.

Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by $10. a.On a graph with TVs on the horizontal axis and "$'s of other consumption" on the vertical, illustrate how the budget constraint for a consumer with exogenous income changes as a result of the tax. b.Suppose you know the bundle on the after-tax budget that is chosen by the consumer.Illustrate on your graph how much in tax revenue the government is raising from this consumer. c.If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but raises the same amount of revenue from the consumer, how would this consumer's budget constraint change?

Suppose that the price of a TV is $200 and he price of an MP3 player is $50.What is the opportunity cost of a TV (in terms of MP3 players), and what is the opportunity cost of an MP3 player (in terms of TVs)?

Derive the budget line equation for the case where good 2 is a composite good.What is the vertical intercept and what is the slope?

For choice sets emerging from "exogenous" income, the budget line will shift parallel whenever both prices change by the same percentage.

Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.Demonstrate, using the budget line equation, how this could have happened if the price of the good on the horizontal axis did not change?

For choice sets generated from endowment bundles, the budget line will shift parallel if both prices change by the same proportion.

Derive the budget line equation for the case where good 1 is a composite good.What is the vertical intercept and what is the slope?