Econ 211

HW#8
Due Date: At the beginning of class 10/4/10
This HW is worth 2 pts

1. (a) Nancy Lerner is trying to decide how to allocate her time in studying for her economics
course. There are two examinations in this course. Her overall score for the course will
be the minimum of her scores on the two examinations. She has decided to devote a
total of 1,200 minutes to studying for these two exams, and she wants to get as high an
overall score as possible. She knows that on the …rst examination if she doesn’t study
at all, she will get a score of zero on it. For every 10 minutes that she spends studying
for the …rst examination, she will increase her score by one point. If she doesn’t study
at all for the second examination she will get a zero on it. For every 20 minutes she
spends studying for the second examination, she will increase her score by one point.
The equation for the line passing through the kinks in Nancy’s indi¤erence curves is
x1 = x2 . Write an equation for Nancy’s budget line. (4 pts)
(b) Solve these two equations in two unknowns to determine the intersection of these lines.
This happens at the point where (x1 ; x2 ) =________.

2. "In a two-good world where individuals spend all their money, both goods can be inferior
goods." Is this statement true or false? A yes or no will not su¢ ce. You must rigorously
explain your reasoning, perhaps using a picture.

3. In Agatha Christie’s (the mystery writer) autobiography, she mentioned how when she was
younger, she never thought she would ever be wealthy enough to own a car - nor so poor
that she wouldn’t have servants. Illustrate, using indi¤erence curves and budget constraints,
her anticipated consumption of cars and servants in her youth in the 1910s and her actual
consumption of cars and servants near her death in the 1970s. Clearly label which budget
constraints and indi¤erence curves are at what which times. Assume that she was like a
typical upper-middle class house in both the 1910s and the 1970s and that her preferences
did not change over the years.

4. Sam consumes only green eggs and ham. Ham is an inferior good for Sam. On day the price
of green eggs goes up.

(a) Illustrate the old and new optimum points, and show both the substitution and income
e¤ects. How does your graph re‡ect the fact that ham is an inferior good?
(b) True or false: When the price of green eggs goes up, Sam certainly buys more ham
than before. Justify your answer carefully, by considering the directions of both the
substitution and income e¤ects.

5. Suppose that the only two goods you purchase are X and Y. One day the price of X goes
down.

(a) Illustrate your old and new budget lines.

(b) Illustrate the substitution and income e¤ects of your consumption of X.
(c) What is the direction of the substitution e¤ect? Why?
(d) If X is an inferior good, what is the direction of the income e¤ect? Why?

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 (e) True or false: If X is an inferior good, then a fall in price must lead to a rise in consump-
tion, but if X is a normal good then a fall in price might lead to a fall in consumption.
Carefully justify your answer in terms of income and substitution e¤ects.

6. Bugs consumes only carrots and lettuce, both of which are normal goods for Bugs. One day
the price of carrots goes up.

(a) Illustrate Bugs’s old and new optimum points, and show both the substitution and
income e¤ects. How does your graphy re‡ect the fact that carrots are a normal good?
How does it re‡ect the fact that lettuce is a normal good?
(b) Can you say for certain whether the substitution e¤ect causes Bugs to buy more or less
lettuce than before? If so, use your graphy to explain why; if not, explain what the
answer would depend on.
(c) Can you say for certain whether the income e¤ect causes Bugs to buy more or less lettuce
than before? If so, use your graph to explain why; if not, explain wha the answer would
depend on.
(d) Whe the price of carrots goes down, can you say for certain whether Bugs would buy
more or less lettuce than before? If so, carefully justify your answer; if not, explain what
the answer would depend on.
(e) Suppose that almost all of Bugs’s income is spent on lettuce. Now when the price of
carrots goes up, do you expect him to buy more or less lettuce than before? Carefully
justify your answer in terms of the income and substitution e¤ects.