Question 1

You have $100 to spend on food and clothing.  The price of food is $5 and price of clothing is $10.

(a) Graph the budget constraint

(b) Suppose the government subsidizes clothing such that each unit of clothing is half price, up to the first 5 units of clothing.  Graph your budget constraint in this circumstance.

Question 2

Consider an income guarantee program with an income guarantee of $6,000 and a benefit reduction rate of 50%.  A person works up to 2000 hours per year at $8 per hour.

(a) Draw the person’s budget constraint with the income guarantee

(b) Suppose that the income guarantee rises to $9,000 but with a 75% reduction rate. Draw the new budget constraint

(c) Which of these two income guarantee programs is more likely to discourage work? Explain.

Question 3

Two consumers, Josh and Mary, together have 10 apples and 4 oranges.

a) Draw the Edgeworth box that shows the set of feasible allocations that are available in this simple economy.

b) Suppose Josh has 5 apples and 1 orange, while Mary has 5 apples and 3 oranges. Identify this allocation in the Edgeworth box.

c) Suppose Josh and Mary have identical utility functions, and assume that this utility

function exhibits positive marginal utilities for both apples and oranges and a diminishing

marginal rate of substitution of apples for oranges. Could the allocation in part (b)—5 apples and 1 orange for Josh; 5 apples and 3 oranges for Mary—be economically efficient?

Question 4

There are two individuals in an economy, Joe and Mary. Each of them is currently consuming positive amounts of two goods, food and clothing. Their preferences are characterized by

diminishing marginal rate of substitution of food for clothing. At the current consumption

baskets, Joe’s marginal rate of substitution of food for clothing is 2, while Mary’s marginal  rate of substitution of food for clothing is 0.5. Do the currently consumed baskets satisfy the