CSUSM Budget Economics Graphs Worksheet
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1. All about budget constraints:
a. If the prices of both goods decrease by the 20%, but the income remains unchanged, what will
happen to the budget line?
b. If the price of the good on the horizontal axis increases by 20%, and the price of the good on the
vertical axis decreases by 20%, but the income remains unchanged, what will happen to the budget line?
For both these questions, draw a well-labeled graph that will include the old and new budget
constraints. Also explain in words the reason behind the changes in the budget lines. Please do not draw
an indifference curve.
2. All about indifference curves: Draw two indifference curves, U1 and U2, with U2 representing a higher
level of utility than U1. Draw each graph placing the amount of the first good on the horizontal axis.
a. A consumer likes both mashed potatoes and meatballs and has a diminishing marginal rate of
substitution of mashed potatoes for meatballs.
b. A consumer likes Dr. Pepper and Pepsi and will accept a can of Dr. Pepper or a can of Pepsi with equal
satisfaction).
c. A consumer likes exactly 2 ounces of peanut butter for every ounce of jelly.
d. A consumer consumes nuts which she neither likes nor dislikes, and ice cream which she likes.
3. Constrained Optimization: Ann’s utility function is U (x, z) = !” (!$”) The price of good x is Px, the price
of good z is Pz, and the income is Y.
a. Solve for her optimal values of good x and good z as a function of Px, Pz, and Y. Show all the steps for
full credit.
b. Assume Px = 1, Pz = 1 and Y = 100. How many units of good x and good z will she consume?
c. If only the price of Px decreased to 50c, how will that affect the equilibrium consumption of the
goods? Draw a well-labeled graph to show the changes. Also, in your graph make sure that you draw the
price consumption curve for Ann.
4. Dora faces prices for chicken and fish of $3 per lbs. and $6 per lbs., respectively. Her consumption of
the two commodities at various weekly allowance levels are shown below. Allowance Chicken (lbs.) Fish
(lbs.) $45 5 5 $72 4 10 $100 3.33 15
a. Use the information to sketch her income consumption curve (ICC) on a graph. In your graph, pay
attention to details. Indicate the slopes and intercepts of the budget lines, the equilibrium points as well
as values of chicken and fish consumed.
b. Draw the Engel curves for both, chicken and fish.
c. What is the income elasticity of fish for Dora as the allowance increases from $72 to $100? What can
you infer about the nature of this good, fish?
Question 5. A US electronics firm is considering moving its production to a plant in Mexico. Its estimated
production function is q = 10L0.32K0.56. In the US, the wage rate and the rental cost of capital are same
and equal to $15. At the Mexican plant, the firm will pay $13.5 as wages and $16.5 as the cost of capital.
a) What are the L and K and cost of producing q = 400 units in Mexico? Show all the steps for full credit.
b) What are the L and K and cost of producing q = 400 units in the USA? Show all the steps for full credit.
c) Draw two well-labeled graphs, one for Mexico and the other for USA to depict these equilibrium
points.
d) What would be the cost of production in Mexico if the electronics firm had to use the same factor
quantities as in the US?
e) Derive the long run cost function (C = C(q)) for the firm if it were to produce in the USA.
Question 6
a) Suppose a firms average cost curve is described by the equation AC = 2q2 – 16q + 90. At what output
level does the marginal cost curve cross the average cost curve?
b) Suppose the cost of producing milkshakes is C = 0.333Q3 – 3Q2 + 15Q + 50. What is the equation for
marginal cost? At what point (output) is marginal cost minimized? What is the minimum marginal cost?
In your work, make sure you show that both the first order and second order conditions are satisfied at
the point where the marginal cost is minimized.
Question 7 Suppose Ralph hires workers at his supermarket at a wage of $12/hour. Ralph also uses
checkstands (i.e., capital) with a rental rate of $10/hour. Production of customers served (i.e., output) is
determined by the hourly production function f (L, K) = 0.5L3/4K2
a. If Ralph wants to serve 400 customers per hour, how many workers and checkstands must he
employ? How much will it cost to serve 400 customers per hour?
b. Derive Ralph’s short-run cost function with the 10 checkstands.
c. Derive the equations for the MC, AC, AVC, and AFC
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Explanation & Answer:
7 Questions
Tags:
graphs
Economy
Budget
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