ECO 303 Intermediate Microeconomic Theory

Solutions to Problem Set 1

BO LI

September 11, 2013

1 Question 1
The equation for new budget line is

3p1 x1 + 6p2 x2 = m

To see whether the budget line becomes flatter or steeper, firstly we can compare the slop of
this budget line with the original one.
p1 p1
Slopenew = Slopeoriginal =
2p2 p2
Obviously,
Slopenew > Slopeoriginal
The budget line becomes flatter.
Althernatively we can see it directly from the graph.

Figure 1: Q1

Email me at bo.li.3@stonybrook.edu

1
2 Question 2
When x2 x2 , the equation of budget line is

p1 x1 + p2 x2 = m

When x2 > x2 , the equation of budget line is

p1 x1 + p2 x2 + t(x2 x2 ) = m

If we rewrite this equation,

p1 x1 + (p2 + t)x2 = m + tx2
So the slope is not a constant.
If the student gives another answer, we can also give them credit.
When x2 > x2 , the equation of budget line is

p1 x1 + (p2 + t)x2 = m

Still we get the slope is not constant.

3 Question 3
In this question we need to think about two different cases. The first one is that the consumer
cant afford to buy x2 units of good 2.
when p2 x2 > m
p 1 x1 + p 2 x2 = m
The second one is the consumer can afford to buy x2 units of good 2.
when p2 x2 m
m p2 x2
p1 x1 + p2 x2 = m if x1
p1
m p2 x2
x2 = x2 if 0 x1 <
p1

2
 Figure 2: Q3

4 Question 4
The equation of original budget line is

p1 x1 + p2 x2 = m

If equation of new budget line is

(p1 + t)x1 + (p2 s)x2 = m

We calculate the slope of this two line.

p1 + t p1
Slopenew = Slopeoriginal =
p2 s p2
We compare the difference of this two slopes with zero.

Slopenew Slopeoriginal
p1 + t p1
= ( )
p2 s p2
p1 p1 + t
= <0
p2 p2 s
The budget line becomes steeper.