Microeconomics 1

HW1

Due date: September 2, 2021

Send your answer to stephaniedame@mail.ugm.ac.id and write on the email subject: HW1-Micro 1

Answer the following questions.

1. Suppose the government is imposing an income tax, 𝑡 (it’s proportional to your income, e.g. 𝑡 =
10%). Illustrate how the income tax will affect the budget set of a consumer?
2. Assuming a consumer is facing only two commodities. Show in graphs the shapes of budget
constraints when she has the case:
a. Both commodities are bads
b. One good and one bad
c. Suppose 𝑝2 is constant at $1 but that 𝑝1 = $1 for 0 ≤ 𝑥1 ≤ 50 and 𝑝1 = $2 for 𝑥1 >
50 (note: both commodities are goods)
3. Since the time of the Galactic Republic, there are two kinds of currencies in planet Utapau:
wupiupi dan druggat. Everything in the galaxy has a wupiupi price and a druggat price. Everyone
has two incomes: wupiupi income and druggat income. To buy an object, Din Djarin has to pay
that object’s wupiupi price in wupiupi money and its druggat price in druggat money. (The shops
simply have two cash registers, and you have to pay at both registers to buy an object.) It is
forbidden to trade one kind of money for the other, and this prohibition is strictly enforced by
Utapau’s ruthless and efficient monetary police. There are just two consumer goods on Utapau:
sushi and banana. All prefer more of each good to less. The wupiupi prices are 1 wp per unit of
sushi and 1 wp per unit of banana. The druggat prices are 2 dr per unit of sushi
and 6 dr per unit of banana.
a. Draw the druggat budget and the wupiupi budget for Din Djarin whose wupiupi income
is 10 and whose druggat income is 30. Shade in the budget set containing all of the
commodity bundles that Din can afford, given his two budget constraints.
b. Cara Dune faces the same prices that Din faces and has the same druggat income as Din,
but Cara has a wupiupi income of 20. Explain how it is that Cara will not spend its entire
wupiupi income no matter what its tastes may be. (Hint: Draw Cara’s budget lines.)
c. A group of radical economic reformers believe that the currency rules are unfair. Why
should everyone have to pay two prices for everything?" they ask. They propose the
following scheme. Everyone will continue to have two currencies, every good will have a
wupiupi price and a druggat price, and everyone will have a wupiupi and a druggat
income. But nobody has to pay both prices. Instead, everyone on Utapau must declare
itself to be either a Wupiupi-Money Purchaser (WMP) or a Druggat-Money Purchaser
(DMP) before it buys anything at all. WMP must make all of their purchases in wupiupi
money at the wupiupi prices, spending only their wupiupi incomes. DMP must make all
of their purchases in druggat money, spending only their druggat incomes. Suppose that
Din has the same income after this reform, and that prices do not change. Before
declaring which kind of purchaser it will be, Din contemplates the set of commodity
bundles that it could afford by making one declaration or the other. Let us call a
commodity bundle attainable if Din can afford it by declaring itself to be a WMP and
 buying the bundle with wupiupi money or if Din can afford the bundle by declaring itself
to be a DMP and buying it with druggat money. Draw in a graph and shade in all of the
affordable bundles.
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