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40. Refer to Figure 21-32. How much income does Hannah earn when she is young?
41. Refer to Figure 21-32. What is the value of the interest rate that Hannah earns on her saving?
42. Refer to Figure 21-32. If Hannah chose to spend $30,000 on consumption when young, then how much could she
spend on consumption when old?
43. Refer to Figure 21-32. From the figure we can determine how much income Hannah earns when young and we can
determine the interest rate. Could the interest rate rise to a level at which Hannah could afford to be at point A?
44. Refer to Figure 21-32. From the figure we can determine how much income Hannah earns when young and we can
determine the interest rate. Could the interest rate rise to a level at which Hannah could afford to be at point D?
45. Is it possible for a normal good to be a Giffen good? Briefly explain.
46. A field experiment conducted by economists in the Chinese province of Hunan provided evidence that, for poor
households in that province, rice is a __________ good.
47. For Meg, the substitution effect of an interest-rate increase is stronger than the income effect. In response to a higher
interest rate, will Meg save more or will she save less?
48. For Molly, the substitution effect of a wage increase is stronger than the income effect. In response to a wage increase,
will Sally work more hours or will she work fewer hours?
49. For Brent, the income effect of a wage increase is stronger than the substitution effect. In response to a wage increase,
will Brent work more hours or will he work fewer hours?
50. For Antonio, the income effect of an interest-rate increase is stronger than the substitution effect. In response to a
higher interest rate, will Antonio save more or will he save less?
51. Answer the following questions based on the table. A consumer is able to consume the following bundles of rice and
beans when the price of rice is $2 and the price of beans is $3.
RICE
BEANS
12
0
6
4
0
8
a.
How much is this consumer's income?
b.
Draw a budget constraint given this information. Label it B.
c.
Construct a new budget constraint showing the change if the price of rice falls $1. Label this C.
d.
Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this
consumer's income increased to $48. Label this D.
52. Draw a budget constraint that is consistent with the following prices and income.
Income = 200
PY = 50
PX = 25
a.
Demonstrate how your original budget constraint would change if income increases to
500.
b.
Demonstrate how your original budget constraint would change if PY decreases to 20.
c.
Demonstrate how your original budget constraint would change if PX increases to 40.
53. Assume that a consumer faces the following budget constraints.
a.
Assuming that income is the same on both occasions, describe the difference in relative
prices between Panel A and Panel B.
b.
If income in Panel B is $126, what is the price of good X?
c.
If income in Panel A is $84, what is the price of good Y?
d.
Assuming that the price of good X is the same on both occasions, describe the
difference in income and price of good Y between Panel A and Panel B.
54. Evaluate the following statement, "Warren Buffet is the second richest person in the world. He doesn't face any
constraint on his ability to purchase commodities he wants."
55. List and briefly explain each of the four properties of indifference curves.
56. Draw indifference curves that reflect the following preferences.
a.
pencils with white erasers and pencils with pink erasers
b.
left shoes and right shoes
c.
potatoes and rice
d.
income and polluted water
(c)
(d)
57. Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.
58. Explain the relationship between the budget constraint and indifference curve at a consumer’s optimum.
59. Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the consumer adjusts
his/her optimal consumption bundle when the price of Coke decreases. Carefully label all curves and axes. What will
happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good?
(Remember to explain the possible change when the income effect dominates and when the substitution effect dominates.)
60. Using the graph shown, construct a demand curve for M&M's given an income of $10.
61. Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would
result from a change in the price of a normal good.
62. Explain the difference between inferior and normal goods. As a developing economy experiences increases in income
(measured by GDP), what would you predict to happen to demand for inferior goods?
63. Janet knows that she will ultimately face retirement. Assume that Janet will experience two periods in her life, one in
which she works and earns income, and one in which she is retired and earns no income. Janet can earn $250,000 during
her working period and nothing in her retirement period. She must both save and consume in her work period and can
earn 10 percent interest on her savings.
a.
Use a graph to demonstrate Janet's budget constraint.
b.
On your graph, show Janet at an optimal level of consumption in the work period equal
to $150,000. What is the implied optimal level of consumption in her retirement period?
c.
Now, using your graph from part b above, demonstrate how Janet will be affected by an
increase in the interest rate on savings to 14 percent. Discuss the role of income and
substitution effects in determining whether Janet will increase, or decrease her savings in
the work period.
