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Chapter 6: Q.4 (page 151)

As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?

Short Answer

Expert verified

When my parents forget to send me a check as a college student, my income drops for the period, and my financial limitation shifts to the left. My basket of goods will be reduced in size.

Step by step solution

01

Step 1:Definition

Consumer choices:

People's choices about products and services are referred to as consumer choices. When we study consumer choice behavior, we examine how consumers make long-term decisions about what to buy or consume.

02

Step 2:Explanation

This is an income effect that is negative.

From the graph, Your monthly income is lower than usual as a result of your parents' cheque not arriving, and your budget constraint shifts back toward the source. If you simply buy everyday items, a decrease in your income means you'll buy fewer of them.

03

Step 3:Conclusion

Therefore, my income reduces for the period when my parents neglect to give me a check as a college student, and my financial limitation swings to the left.

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Most popular questions from this chapter

Maya divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.

a. Show the effect of the frost on Maya’s budget constraint.

b. Show the effect of the frost on Maya’s optimal consumption bundle, assuming that the substitution effect outweighs the income effect for croissants.

c. Show the effect of the frost on Maya’s optimal consumption bundle, assuming that the income effect outweighs the substitution effect for croissants.

Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla’s budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in the marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla’s utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers

Pick a point on an indifference curve for wine and cheese and show the marginal rate of substitution. What does the marginal rate of substitution tell us?

At two points on an indifference curve,

a. the consumer has the same income.

b. the consumer has the same marginal rate of substitution.

c. the bundle of the goods cost the consumer the same amount.

d. the bundle of goods that yield the consumer same satisfaction.

As a general rule, is it safe to assume that a change in the price of good will always has its most significant impact on the quantity demanded of that good, rather than on the quantity demanded of other goods? Explain
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