Economics 4 questions

ECO 303: Intermediate Microeconomic Theory

Problem Set 1

Due Date: February 10

th (in the beginning of the class).

Late submissions will not be accepted.

Question 1

Originally the consumer faces the budget line p1x1 + p2x2 = m. Then the

price of good 1 triples and the price of good 2 becomes 5 times larger.

Write down an equation for the new budget line in terms of the original

prices. Does the budget line becomes flatter or steeper?

Question 2

If the government imposes a quantity tax on the consumption of a good, it

means that the consumer has to pay for each unit of the good its price plus

the tax. For example, if the price of a chocolate bar is $5 and the government

imposes a tax of 20 cents on the consumption of a chocolate bar, then the

actual price the consumer pays for a chocolate bar is $5 + $0.2 = $5.20.

Suppose there are two goods available for consumption, good 1 and good

2, and that the government taxes consumption of good 2 that is in excess

of quantity x̄2 (that is, consumption of good 2 up to quantity x̄2 is exempt

of tax). Denote by t the amount of dollars a consumer has to pay for every

unity she consumes in excess of x̄2.

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Intermediate Microeconomic Theory – Problem Set 1

Draw the budget set of a consumer with income m. Is the slope of the

budget line constant?

Question 3

Suppose there are two goods available for consumption, good 1 and good 2,

and the government has imposed rationing on the consumption of good 2, so

that no more than x̄2 can be consumed by a given consumer.

Draw the budget set of a consumer who has income m.

Question 4

If the government establishes a quantity subsidy on the consumption of

a good, it means that the consumer has to pay for each unity of the good

its price minus the subsidy. That is, the price of the good becomes, in the

consumer’s point of view, p � s, where p is the price of the good and s is the subsidy.

Suppose the budget line is given by p1x1 + p2x2 = m. The government

decides to impose a quantity tax of t on good 1 and a quantity subsidy of

s on good 2. What is the formula for the new budget line? Can you tell

whether it becomes flatter or steeper?

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