Week 3 Assignment

Chapter 4, Q2

a)

The maximum quantity of a commodity (good X) that is affordable with the given income (M)
is:

X = M/Px

The price of good X, Px = $ 5 and maximum affordable quantity of good X is 20 units.

Substituting the values in the relationship gives:

20 = M/5

M = $100

With income of $100 the maximum affordable quantity of good Y is 20 units. Here the price of
good Y is

Y = M/Py

20 = 100/Py

Py = $ 5

Price of good Y is Py = $ 5

b)

The maximum quantity of commodity that is affordable with the given income is X = M/Px

The price of good X, Px= $5 and the maximum affordable quantity of good X is 20 units.
Substituting the values in the relationship gives:

20= M/5

M= $100

c)

At the initial equilibrium point A, the consumer consumes 10 units of good Y at $5 each. Hence
the money income spent in consuming good Y is $50. 

The remaining $50 are used in consuming good X which is priced at $5 per unit. Therefore the
consumer consumes 10 units of good X ($50/$5)
 Week 3 Assignment
d)

At point B, the consumer is able to consume a more than twice the units of good Y. The
maximum affordable quantity of good X is still 20 units while the maximum affordable quantity
of good Y has increased to 40 units. This implies that the price of good Y has fallen which has
enabled the consumer to consume more units of relatively inexpensive good Y. 

To analyze if the consumer is better off or worse off, first we need to compute the reduction in
the quantity consumed of good X. Since the consumer can consumes 40 units of good Y as the
maximum affordable quantity with unchanged income of $100, the price of good Y has fallen to:

Y = M/Py

40 = $100/Py

Py = $ 2.5

This implies that consumer spent $62.50 on the purchase of good Y (25 units at $2.50 per unit),
remaining $37.50 are used in consuming good X which is still priced at $5 per unit. Therefore
the consumer consumes 7.5 units of good X ($37.50/$5).

Since the reduction in the quantity of good X is smaller than the increase in the quantity of
good Y, it can be concluded that the consumer is better off as more is always preferred to less.

Chapter 4, Q6
a)
Given that the budget line of consumer:
$600 = $100X + $200Y

We know that the equation of the budget line is:

Where, Px & Py denotes prices of good X & good Y. 
Qx & Qy shows quantity of goods X & Y. 
M denotes money income of the consumer. 
 
So, price of good X = $100 &
price of good Y = $200.

b)
The maximum units of good Y that can be purchased with given income can be
calculated as income divided by price of good Y:
i.e 600/200 = 3 units
 Week 3 Assignment
c)
The maximum units of good X that can be purchased with $600 income is 6 units.
i.e 600/100 = 6 units

d)
With $100 certificate of good X, one more unit of good X can be purchased even if all
$600 income is spent on good Y.
i.e 700/100 = 7 units

e)
With income of $700 (M + $100), 7 units of good X can be purchased if all income is
spent on good X.
i.e M + 100/100 = 600 + 100/100
= 700/100 = 7 units

f)

The consumer's main aim is to choose the best consumption bundle that can satisfy his or
her expectations. As per the above calculations and the diagram, since point D is at the
higher indifference curve, it is more likely to be chosen by the consumer to be his or her
more preferred consumption bundle. Ranking the consumers preference, the most
preferred bundle will be Point D, next is, Point B, then, Point C , and lastly, Point A.

g)

As per the above calculations and diagrams, we can easily say Product X is a normal
good. Normal Good is a good that when an increase in the consumer's income happens,
there will be an increase in its demand. Since, the consumers income increases, the
demand for Product X also increases.

Chapter 4, Q13

Use the following equation,

X = M/Px

Here, M  is the Total Income, X is the Maximum Quantity of Tiers.

Px is the Price of the Tier

M=$360
 Week 3 Assignment

Px = $40

By substituting we will get,

X=M/Px

= 360/40 = 9

Therefore, the maximum quantity that is affordable of the tiers is 9 units, it is the
horizontal intercept of the budget line.

Using the equation again;

Y= M/Py

M= $360, Py = $1

Y = 360/1 = 360

Therefore, the maximum quantity that is affordable of the other goods is 360 units, it is
the vertical intercept of the budget line. Here, tire offer was promoted in a recent
newspaper circular: "Buy three, get the fourth tire free-limit one free tire per customer."
Therefore, the maximum tier that he can buy is 10 units while the maximum quantity that
he can purchase for all the other goods remain at  360.

Thus, looking at the graph, we can say that the opportunity set will still remain the same
if customer will get the offer of "Buy three, get the fourth tire free -limit one free tire per
customer." when it is shifted to the right.
Week 3 Assignment
 Week 3 Assignment
Chapter 4, Q17

Number of dozens = 200/6 = 33.333 thus free bagel is 30.

Number of free bagel = (30/10) * 12 = 36

Price per bagel = price per dozen/ number in dozen = 6/12 = 0.5

Number of bagel if spends whole 200 dollars = 200/ price per bagel + free bagels

= 200/0.5 + 36 = 436

If the price is reduced to $ 3, the new price per dozen is:

Price per dozen = (6-(6* 0.03)) = 5.82

Price per bagel is 5.82/12 = 0.485

Number of bagels if spent all 200 is = 200/0.485 = 412

 Week 3 Assignment

B1 is the new budget set. The change in budget set shows the decrease in consumption.
Thus, it can be seen that consumers now can spend less amount on other goods. Hence,
consumers are more likely to avoid the second program. Therefore, the second program
will not have the same effect.

Chapter 4, Q15

An employee divides her income of $1,000 between health insurance and other goods.

budget line equation would be:

PxQx + PyQy = M

Given, income M = $1,000 per week

Price of health insurance Px = 200 per week

Price of other goods Py= 100 per week

Qx and Qy are quantity of health insurance and other goods respectively. So budget line
is:

200Qx + 100Qy = $1000

Vertical intercept = 1000/100 = 10

Horizontal intercept = 1000/200 = 5

 Week 3 Assignment

In this graph BL represent the budget line and IC is the indifference curve. At point E
indifference curve is tangent to the budget line. Thus, point E represent the equilibrium
point.

If the employee receives $200 worth of health insurance per week and suppose he/she is
spending the entire income on other good, he/she can get one unit of health insurance per
week from the employer.

Thus, the budget line is horizontal till one unit and then it will be downward sloping
 Week 3 Assignment
In the graph BOC is the new budget line after receiving one extra unit of health
insurance. If employee is getting a raise of $200 per week that was taxable at the rate of
25%, the after-tax income rises to $150 ($200 - 25% of $200).

The new budget line is :

200Qx + 100Qy = 1150

When the employee gets additional income the slope of budget line will remain same and
budget line shifts outwards. With this new income ($1150) the employee can purchase
more of both the goods. Thus, employee provides him/her with the higher level of
satisfaction.

In this case the employee is better off when he/she has a strong preference for other
goods.