Econ 203 lab 5

2. When the price of gasoline is $1gal, you consume 1000 gal/yr. Then two things happen:

(1) The price of gasoline rises to $2/gal and (2) a distant uncle dies, with the instruction to his executor to send you a check for $1000/yr. If no other changes in prices or income occur, do these two changes leave you better off than before?

Question 2: A consumer is originally buying bundle C on the diagram below. Suppose that the government places a tax on the purchases of gasoline, but also give out a lump sum rebate. For this consumer, the impact of the policy makes bundle C just affordable. If this consumer has the typical shape to her indifference curves, will she still purchase bundle C? Briefly explain.

Question 3: Betty monthly demand curve for litres of water is illustrated in the graph below. She pays a flat fee of $50 per month for water. Once her fee is paid, Betty can consume any quantity she wishes for no additional charge. How much water does she consume each month? What is Betty's consumer surplus, given that she only pays the Flat fee of $50 per month?

Question 4: Page 528529 in Old Text and Page 582 in New Text

1. Bert has an initial endowment consisting of 10 units of food and 10 units of clothing. Ernies initial endowment consists of 10 units of food and 20 units of clothing. Represent these initial endowments in an Edgeworth exchange box. 2. Bert regards food and clothing as perfect 1-for-1 substitutes. Ernie regards them as perfect complements, always wanting to consume 3 units of clothing for every 2 units of food.

a. Describe the set of allocations that are Pareto preferred to the one given in Problem 1. b. Describe the contract curve for that allocation. c. What price ratio will be required to sustain an allocation on the contract curve?

3. How will your answers to Problem 2 differ if 5 units of Ernies clothing endowment are given to Bert?

6. Suppose Sarah has an endowment of 2 units of X and 4 units of Y and has indifference curves that satisfy our four basic assumptions (see Chapter 3). Suppose Brian has an endowment of 4 units of X and 2 units of Y, and has preferences given by the utility function U(X, Y) = min {X, Y}, where

On an Edgeworth box diagram, indicate the set of Pareto-superior bundles.