Econ 201 Winter 2013 Assignment 1

The assignment is due in class on Thursday, January 24

th
. Answer each of the
following questions. You must provide justification to receive marks. Students may
collaborate in solving the problems but must individually write up their answers.

Question 1. Let x = (x
1
, x
2
) be a consumption bundle where x X = Z
+
x Z
+
. That is,
only discrete (non-negative) amounts of each of the two goods can be obtained. Suppose
the prices of the two goods are p
1
= 4 and p
2
= 3 and the consumers income is m = 10.
i) Define the consumers budget set a) using an equation and b) by listing the
points included in the set. Plot it on a graph with x
1
measured on the horizontal axis and
x
2
on the vertical axis.
ii) If p
1
rose to $5/unit, how would the budget set change?

Question 2. A consumer divides his income ($2000/month) between necessities (like
housing, food and clothing) and entertainment. Let entertainment be represented by x
1
,
its price be $10/unit and suppose it can be purchased in any fractional amount of a unit. If
we treat the necessities as a composite good x
2
, do the following.
a) Using an equation, define the budget set for the consumer if his expenditure
equals his income.
b) What is the opportunity cost of consuming an additional unit of
entertainment?
c) Use a graph to represent the budget set.
d) If the price of housing decreases by 10%, how will the budget set change?
e) If the price of entertainment increases by 25%, graph the new budget set.

Question 3. Answer the following using examples or clear reasoning.
a) Which of the following relations are transitive:
i. is shorter than,
ii. is a friend of?
b) Which of the following relations are complete (ie. either xRy, or yRx (or both),
where R is the relation)?
i. Is not greater than on the set of positive integers, {1,2,3,};
ii. is saltier than on the set of snacks available in vending machines
in Kitchener/Waterloo.
c) Which of the following relations are reflexive?
i. is at least as fast as,
ii. is the same age as.

Question 4. Sketch an indifference curve through the consumption bundle (x
1
, x
2
) =
(2,1) (where (x
1
, x
2
) R
+
2
) and indicate the set of better than bundles when the
preferences exhibit the following:
a) Commodity x
1
is a good and commodity x
2
is a bad.
b) Preferences are monotone but not strongly monotone.