Managerial Economics

Managerial Economics

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Please complete the questions in the attached file titled “Problem Sets 2_Replication Questions(2).docx”

Attached you will also find a study guide titled “Problems Sets 2-Study Guide(1).docx” to help you complete the homework.

The question looks long but only 1 page of answers is needed from you.

Problem Sets 1- Study Guide
Module 2: Consumer Behavior

Chapter 4: Consumer Behavior/Budget Line

1) A consumer has $400 (budget) to spend  on goods X and Y. The market prices of these two goods are Px=$20 and Py=$50

a) What is the market rate of substitution (slope of budget line) between good X and good Y
b) Illustrate/write the consumer’s budget line in a carefully labeled diagram
c) On the same diagram, show how the consumer’s budget line changes if income increases to $600
d) If the price of good X increases to $40 and income (budget) is $400, how the does the budget line change? Show it on separate diagram identifying the old and new budget line.
e) Write the regression equation of for the consumer’s budget line (Y) after price increase.

Answer:
a) MRS=-PX/PY=-20/50=-0.4 (slope of budget line)

b) Find max of Good X=M/Px=400/20=20
Good Y max=M/Py=400/50=8

Good X max= x axis (20)
Good Y max= y axis (8)

c) Right shift of the budget line with new income/budget (600 dollars)

Find Good X max=600/20=30
Find Good Y max=600/50= 12

Good X max= x axis (30)
Good Y max= y axis (12)

d) Remember the rule: Price increase in good X rotates the budget line clock wise; price decrease in good X rotates it counter-clockwise (refer to course slides).

Max Good X changes due to price increase

Good X max= M/Px= 400/40=10

e) Remember the rule: Regression equation of the budget line is:
Y=(M/Py)-(Px/Py)X
Therefore, Y after price increase=Y=(M/Py)-(Px/Py)X

New price of X is 40

y= (400/50)-(40/50)X
y=8-0.8X

Remember the rules: Change income versus Change in Price

Another example: Figure below illustrates an increase in the price of good X from $5 to $10. See how the budget line rotates clockwise (Note that X and Y are maximum amount consumed). With an increase in the price of Good X (relative to Y) leads to less consumption of good X. Max consumption drops from 50 units of good X  to 25 units of good X.

2) End of Chapter 4 textbook:  Consumer has $400 (budget) to spend  on goods X and Y. The market prices of these two goods are Px=$10 and Py=$40
a) What is the market rate of substitution (slope of budget line) between good X and good Y
b) Illustrate/write the consumer’s budget line in a carefully labeled diagram
c) On the same diagram, explain how the consumer’s budget line changes if income increases by $400. How does the $400 increase in income alter the market rate of substitution between good X and good Y?
a.    The market rate of substitution is  .
b.    See Figure 4-1.

Remember the rule: Regression equation of the budget line is:
Y=(M/Py)-(Px/Py)X

Y=(400/40)-(10/40)X

Y=10-2.5X

c.    Increasing income to $800 (income increases by $400) expands the budget set, as shown in Figure. Budget line shifts to the right. However, since the slope is unchanged, so is the market rate of substitution.

Replication Questions
Module 2: Consumer Behavior

Chapter 4: Consumer Behavior/Budget Line

1) A consumer has $400 to spend  on goods X and Y. The market prices of these two goods are Px=$10 and Py=$40

a) What is the market rate of substitution (slope) between good X and good Y
b) Illustrate/write the consumer’s budget line (regression equation) in a carefully labeled diagram.
c) Explain how the consumer’s budget line changes if income increases to $600
d) If the price of good X increases to $20 and income is $400, how the does the budget line change?
e) Write the equation of for the consumer’s budget line (Y) after price increase.

Answer:

2)

Please note that I reworded question b, c a little bit. Consider the following questionsinstead.

a) Write the equation of the budget line (just the formula)
b) Illustrate the consumer’s opportunity set (budget line) in a carefully labeled equation.
c) Explain the  how the consumer’s opportunity set changes when the price of good X increases to $10. In other words, how does the budget line rotate? Compare the market rate of substitution (slope) before and after price increase in good of X.

 

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