Principles of Economics (MindTap Course List)
8th Edition
ISBN: 9781305585126
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 21, Problem 5PA
Subpart (a):
To determine
The budget constraint of a person.
Subpart (b):
To determine
The budget constraint of a person.
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Eric buys only milk and cookies. In year 1, Eric earns $90, milk costs $2 per quart, and cookies cost $3 per dozen. Use the green line (triangle symbol) to draw Eric's budget constraint on the following graph.
Now suppose that all prices increase by 10 percent in year 2 and that Eric's salary increases by 10 percent as well.
Use the blue line (circle symbol) to draw Eric's new budget constraint on the preceding graph.
True or False: Eric will consume more milk and fewer cookies in year 2 than in year 1.
True
False.
Currently, Paula is maximizing utility by purchasing 5 TV dinners (T) and 4 Lean Cuisine meals (L) each week.
Graph Paula’s initial utility-maximizing choice.
Suppose that the price of T rises by $1 and the price of L falls by $1.25. Can Paula still afford
to buy her initial consumption choices? What do you know about her new budget constraint?
Use your graph to show why Paula will choose to consume more L and less T given her new budget constraint. How do you know that her utility will increase?
Some economists define the ‘‘substitution effect’’ of a price change to be the kind of change shown in part c. That is, the effect represents the change in consumption when the budget constraint rotates about the initial consumption bundle. Precisely how does this notion of a substitution effect differ from the one defined in the text?
If the substitution effect were defined as in parts, how would you define ‘‘the income effect’’ to get a complete analysis of how a person responds to a…
1. Gertrude had a weekly income $9. At that time, a bulla sold for $1 and a drink for
$1.50.
a) What is Gertrude's real income in terms of bullas?
b) What is her real income in terms of drinks?
c) What is the relative price of a drink (in terms of bullas)?
d) Sketch Gertrude's budget constraint (placing drinks on the vertical axis).
e) Suppose she chooses to consume 3 bullas and 4 drinks per week. Is she satisfying
her budget constraint?
f)
Sketch the budget line if the price of bullas rises to $2 and all other values remain
unchanged.
g) Sketch the budget line if the price of drinks rises to $3 and all other values remain
at their original levels.
h)
i)
Sketch the budget line if Gertrude gets a raise to earn $18 a week and prices
remain at their original levels.
Supposes all changes take place together: the price of bullas rises to $2, the price of
drinks rises to $3, and Gertrude gets a raise to earn $18 a week. How does the new
budget line compare to the original one?
Chapter 21 Solutions
Principles of Economics (MindTap Course List)
Ch. 21.1 - Prob. 1QQCh. 21.2 - Prob. 2QQCh. 21.3 - Prob. 3QQCh. 21.4 - Prob. 4QQCh. 21 - Prob. 1CQQCh. 21 - Prob. 2CQQCh. 21 - Prob. 3CQQCh. 21 - Prob. 4CQQCh. 21 - Prob. 5CQQCh. 21 - Prob. 6CQQ
Ch. 21 - Prob. 1QRCh. 21 - Prob. 2QRCh. 21 - Prob. 3QRCh. 21 - Prob. 4QRCh. 21 - Prob. 5QRCh. 21 - Prob. 6QRCh. 21 - Prob. 7QRCh. 21 - Prob. 1PACh. 21 - Prob. 2PACh. 21 - Prob. 3PACh. 21 - Prob. 4PACh. 21 - Prob. 5PACh. 21 - Prob. 6PACh. 21 - Prob. 7PACh. 21 - Prob. 8PACh. 21 - Prob. 9PACh. 21 - Prob. 10PACh. 21 - Prob. 11PACh. 21 - Prob. 12PA
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