Eric Stevanus – 2201756600 – LA28

Assignment LA28 ke 5

1. A consumer must divide $600 between the consumption of product X and product Y. The
relevant market prices are Px = $10 and Py = $40. (LO2)
a. Write the equation for the consumer’s budget line.
b. Illustrate the consumer’s opportunity set in a carefully labeled diagram.
c. Show how the consumer’s opportunity set changes when the price of good X
increases to $20. How does this change alter the market rate of substitution
between goods X and Y?
a) Consumer’s budget line equation:
10 x+ 40 y=600
b)

10
The Marginal Rate of Substitution of Product X for Product Y :
40
= 14
Yellow line: affordable consumption or feasible
Blue line: unaffordable consumption, currently not feasible
Eric Stevanus – 2201756600 – LA28
c)

20
The New Marginal Rate of Substitution of Product X for Product Y :
40
= 12
Yellow line: affordable consumption
Blue line: unaffordable consumption

2. In the answer to Demonstration Problem 4–2 in the text, we showed a situation in which
a gift certificate leads a consumer to purchase a greater quantity of an inferior good than
he or she would consume if given a cash gift of equal value. Is this always the case?
Explain. (LO6)

One of the principle of economics is that People respond to incentives. When considering a
decision, it’s always logical to take the one that will benefits us the most. So when we give a gift
certificate to a consumer, sells in those goods would in most cases goes up. and the reason of
why the quantity the consumer purchase would be bigger than when they’re given a cash gift, is
Eric Stevanus – 2201756600 – LA28
because when you give them cash gift, we open a lot of other option for them to choose on
how they would spend those cash. While using gift certificate ( considering the fact that they
can’t cash in those gift certificate), would only give them one option, which is to use those gift
certificate on our products.

3. Provide an intuitive explanation for why a “buy one, get one free” deal is not the same as
a “half-price” sale. (LO6)

Let’s say we have product x, which have a price of $8

When we use the “ buy one, get one free”, the customers still have to pay a minimum of $8 to
purchase those product

When we use the “ half-price”, the customer now only have to pay a minimum of $4 to
purchase the product, and now they have an alternative and option on how to spend the
remaining $4 on another unit, or perhaps even saving it .
So, the consumer surplus on the” half-price “sale, is more than the one on “buy one, get one
free sale”

4. 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 good Y is an inferior good.
(LO3)
a. Income doubles.

b. Income quadruples and all prices double.

c. Income and all prices quadruple.

d. Income is halved and all prices double.

a) Increase in X decrease in Y, people prefer to buy X since Y is an inferior Product. How

much increase cannot be determined, we have to know the cross price elasticity.
b) Increases in X , decrease in Y
c) Stays the same
d) X decreases and Y increases

5. A consumer’s budget set for two goods (X and Y) is 600 ≥ 3X + 6Y. (LO2)
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. Given the equation for the budget set, can you determine the prices of the two
Eric Stevanus – 2201756600 – LA28
goods? The consumer’s income? Explain.

a)

Green line : affordable consumption possibilities

Blue line: unaffordable consumption possibilities given current conditions.

b) No, the budget set will remain the same, because the consumption possibilities will
remain the same.
We can see this easily in the new budget set formula, which is:
1200≥ 6X + 12Y , which is the same as 600≥ 3X + 6Y

c) No, because the budget set formula is the ration between those prices with the person’s
income. As we can see on answer B, where even though the price and the person’s
income double, the formula remains the same.
Eric Stevanus – 2201756600 – LA28
6. A worker views leisure and income as “goods” and has an opportunity to work at an
hourly wage of $15 per hour. (LO7)
a. Illustrate the worker’s opportunity set in a given 24-hour period.

b. Suppose the worker is always willing to give up $11 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?

a)

C= Consumption of income in dollars

L= Hours of Leisure
C=360 –15L

b) The worker indifference curve does not exhibit diminishing MRS of substitution
The worker always trades between the two goods at the same rate.
Since $11 is less than $15, the worker will choose to work 24 hours
Eric Stevanus – 2201756600 – LA28