Problem Set 1: Budget Constraint

Due: 1pm, Tuesday, Sept 19, online or in class

Econ 250D1
Licun Xue

A. Alice consumes two commodities, x and y. The prices for x and y are
px = py = 1 (dollar per unit). Alices income is $100. Draw her budget set.
On her birthday, Alice received a present of 3 units of y. Draw Alices
new budget set for each of the following two cases:
(1) Alice is allowed to sell the present.
(2) Alice cannot sell the present.

B. Bob earns an income of 100 dollars and he consumes two goods, x and y.
The price of good x is 2 dollars per unit and that of good y is 4 dollars per
unit. Draw Bobs budget set.
Assume, now, that for each unit of good x that Bob buys, he gets one
quarter of good y for free. Draw Bobs new budget set in each of the following
two cases:
(1) Bob is not allowed to resell either good x or good y.
(2) Bob is allowed to resell (only) good y .

C. Carol has an income of 100 dollars, which she spends on books and tele-
phone calls. (Both commodities are assumed to be perfectly divisible.) The
price of a book is one dollar of a phone call is 20 cents. Draw Carols budget
set.
Suppose, now, that the phone company changes the pricing scheme and
charges a at fee of 20 dollars which includes n free calls and x cents per
call after the rst n calls. Draw Carols budget set for each of the following
three cases:
(1) n = 200 and x = 20.
(2) n = 200 and x = 10.
(3) n = 50 and x = 10.