Originally PX is €120 and PY is €80. True or false: If PX increases by €18 and PY increases by €12, the new budget line will be shifted inward and parallel to the old budget line. Explain.

Intermediate Micro economics

Q1. The Acme Seed Company charges €2/kg for the first 10 kg you buy of marigold seeds each week and €1/kg for every kilogram you buy thereafter. If your income is €100/wk, draw your budget constraint for the composite good and marigold seeds.

Q2. Same as Problem 1, except now the price for every kilogram after 10 kg/wk is €4/kg.

Q4. Originally PX is €120 and PY is €80. True or false: If PX increases by €18 and PY increases by €12, the new budget line will be shifted inward and parallel to the old budget line. Explain.

Q5. Martha has €150 to spend each week and cannot borrow money. She buys Malted Milk Balls and the composite good. Suppose that Malted Milk Balls cost €2.50 per bag and the composite good costs €1 per unit. a). Sketch Martha’s budget constraint. b). What is the opportunity cost, in terms of bags of Malted Milk Balls, of an additional unit of the composite good?

Q6. In Problem 5, suppose that in an inflationary period the price of the composite good increases to €1.50 per unit, but the price of Malted Milk Balls remains the same. a). Sketch the new budget constraint; b). What is the opportunity cost of an additional unit of the composite good?

Q7. In Problem 6, suppose that Martha demands a pay raise to fight the inflation.
Her boss raises her salary to €225/wk. a). Sketch the new budget constraint; b). What is the opportunity cost of an additional unit of the composite good?

Q13. Paula, a former actress, spends all her income attending plays and movies and likes plays exactly three times as much as she likes movies. a). Draw her indifference map; b). Paula earns €120/wk. If play tickets cost €12 each and movie tickets cost €4 each, show her budget line and highest attainable indifference curve. How many plays will she see? c). If play tickets are €12, movie tickets €5, how many plays will she attend?

Q15. Boris budgets €9/wk for his morning coffee with milk. He likes it only if it is prepared with 4 parts coffee, 1 part milk. Coffee costs €1/100g, milk €0.50/100g. How much coffee and how much milk will Boris buy per week? How will your answers change if the price of coffee rises to €3.25/100g? Show your answers graphically.

Q16. The U.S. government wants to support education but must not support religion. To this end, it gives the University of Notre Dame $2 million with the stipulation that this money be used for secular purposes only. The accompanying graph shows Notre Dame’s pre-federal-gift budget constraint and best attainable indifference curve over secular and non-secular expenditures. How would the university’s welfare differ if the gift came without the secular-use restriction?

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