Problem set 2: elasticity and basic consumer theory – Winter 2009
J. Wahl – Microeconomic Principles
1. T/F and explain. The marginal utility of any good equals its price.
2. T/F and explain. Demand curves with constant slope have
constant own-price elasticity.
3. Suppose that good X is available for $2 per unit for the first 100 units, and for 25
cents per unit thereafter. Good Y is available at a constant $1 per unit.
a. Draw a consumer's budget line for an income of $300.
b. Is it possible to have more than one equilibrium point in this scenario?
Explain.
4 If perfect substitutes have different prices, the consumer will never choose the
more expensive good. Explain, using an indifference curve – budget constraint graph.
5. One often hears consumer groups complaining that businesses simply "pass along"
taxes to consumers. Evaluate their complaint, referring particularly to the elasticities of
supply and demand curves. Support your answer with graphical analyses.
6. T/F and explain. You are not allowed to bring food into a movie theater.
Therefore, the theater owner is perfectly free to set the price of candy sold at the theater.
(So far, everything I've told you is true!) The owner would never choose a price for candy
where the quantity of candy demanded at that price is price-inelastic.
7. So far, we have drawn indifference curves between two goods, like beer and
cookies. Please illustrate how one could draw indifference curves between a good (like
cookies) and a BAD (like garbage). Indicate the shape of the curves and explain what
you have drawn. Also, draw an arrow on your indifference curve map pointing toward
increasing utility.