Problem set 3
1. A consumer has an income of 100 and faces prices of Px = 1 and Py = 5. Graph the budget line
and show how it changes when the prices of good X increases to Px1 = 5.
2. A consumer must spend all of her income on two goods, X and Y. In each of the following
scenarios, indicate whether the equilibrium consumption of goods X and Y will increase or
decrease. Assume good X is a normal good and Y is an inferior good.
a. Income doubles.
b. Income quadruples and all prices double.
c. Income and all prices quadruples.
d. Income is halved and all prices double.
3. A consumer’s budget set for X and Y is 800 ≥ 4X + 2Y.
a. Illustrate the budget set in a diagram.
b. Does the budget set change if the prices of both goods double and the consumer’s
income also doubles? Explain.
c. What are the prices of the two goods and the consumer's income?
4. A worker views leisure and income as ‘goods’ and has an opportunity to work at an hourly
wage of $16 per hour.
a. Illustrate the worker’s opportunity set in a given 24-hour period.
b. Suppose the worker is always willing to give up $10 of income for each hour of
leisure. Do her preferences exhibit a diminishing marginal rate of substitution? How
many hours per day will she choose to work?