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Economics 310, Fall 2001
First Homework
Prof. Kenneth Ng
Dept. of Economics
COBAE
California State University-Northridge
Problem 1-9:30 AM
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Question 1. Consider a person with a $50 per week to spend on entertainment. Every week he
can either spend his budget going to the movies or bar hopping. A ticket to the movies costs $10
and a drink at the local bar is $5.
Draw his budget line and indifference curves if he buys 4 movie tickets per week and spends the
rest of his income at the local bar.
Suppose his entertainment budget increased to $80 per week and you observe him buy 5 movie
tickets each week. Show the effect of the increase in budget if both movies and drinks are normal
goods.
Show the effect of the increase in budget if movies are inferior and drinks are normal.
Suppose the old local movie theater is torn down and replaced by a new multiplex with stadium
style seating, digital sound, huge screens, and more comfortable seats. Viewing a movie is much
more enjoyable. At the same time, the theater raises the price of movie tickets to $12.50.
 What effect will this have on the person’s budget line between movies and drinks? Show
graphically.
 What effect will this have on the person’s indifference curves between movies and drinks.
Show graphically.
 Explain the effect on the person’s indifference curves using the concept of Marginal Rate of
Substitution.
 Show the dual effect of the change in the price of tickets and the new movie theatre
assuming both movie tickets and drinks are normal.
 True, false, uncertain. Explain. The total expenditure on movies will increase.
Consider a person with a $50 per week to
spend on entertainment.
Movies
Every week he can either spend his budget
going to the movies or bar hopping. A ticket to
the movies costs $10 and a drink at the local
bar is $5.
Draw his budget line and indifference curves if
he buys 4 movie tickets per week and spends
the rest of his income at the local bar.
8
Suppose his entertainment budget increased to
$80 per week and you observe him buy 5 movie
tickets each week. Show the effect of the
increase in budget if both movies and drinks are
normal goods.
5
normal
4
Show the effect of the increase in budget if
movies are inferior and drinks are normal.
inferior
2
6
10
16
Drinks
Suppose the old local movie theater is torn down and
replaced by a new multiplex with stadium style
seating, digital sound, huge screens, and more
comfortable seats. Viewing a movie is much more
enjoyable. At the same time, the theater raises the
price of movie tickets to $12.50.
Movies
8
What effect will this have on the person’s
budget line between movies and drinks? Show
graphically.
6.4
What effect will this have on the person’s
indifference curves between movies and drinks.
Show graphically.
5
Explain the effect on the person’s indifference
curves using the concept of Marginal Rate of
Substitution.
Show the dual effect of the change in the price
of tickets and the new movie theatre assuming
both movie tickets and drinks are normal.
True, false, uncertain. Explain. The total
expenditure on movies will increase.
6
16
Drinks
Suppose the old local movie theater is torn down and
replaced by a new multiplex with stadium style
digital
sound,
hugeand
screens,
and more
Becauseseating,
the movie
theatre
is nicer
viewing
comfortable
seats.
movie relative
is much more
movies more
enjoyable,
the Viewing
value of amovies
At the same time, the theater raises the
to drinks enjoyable.
falls.
price of movie tickets to $12.50.
This causes the slope of the IC, the MRS of drinks, to
fall.
What effect will this have on the person’s
budget line between movies and drinks? Show
graphically.
Movies
8
6.4
What effect will this have on the person’s
indifference curves between movies and drinks.
Show graphically.
5
Explain the effect on the person’s indifference
curves using the concept of Marginal Rate of
Substitution.
Show the dual effect of the change in the price
of tickets and the new movie theatre assuming
both movie tickets and drinks are normal.
True, false, uncertain. Explain. The total
expenditure on movies will increase.
6
16
Drinks
Movies
Change after rise
in price and
construction of
new theatre
8
Suppose the old local movie theater is torn down and
replaced by a new multiplex with stadium style
seating,
digital sound,on
huge
screens,
The
expenditures
movies
isand more
comfortable seats. Viewing a movie is much more
given
by:
enjoyable. At the same time, the theater raises the
price of movie tickets to $12.50.
PmovieQmovies
What effect will this have on the person’s
The price
of movies is going up.
budget line between movies and drinks? Show
This by
itself would cause an
graphically.
increase in expenditures on movies.
6.4
What effect will this have on the person’s
However,
the Qcurves
of movies
bought
indifference
between
movies is
and drinks.
Show graphically.
also changing.
The net change in
5
movieExplain
purchases
is indeterminate
the effect on the person’s indifference
because
theusing
construction
the newRate of
curves
the concept of
of Marginal
movieSubstitution.
theatre would cause movie
consumption to go up, the
Show the dual effect of the change in the price
substitution
effect
would
cause
theassuming
of tickets
and the
new movie
theatre
consumption
oftickets
movies
go are
down,
both movie
and to
drinks
normal.
and the income effect would cause
True, false, uncertain. Explain. The total
the consumption
of movies to go
expenditure on movies will increase.
down.
Change after
rise in price
with old
theatre
6
16change in
Therefore, the
expenditures is indeterminate.
Drinks
Problem 2-9:30AM
 Consider the demand schedule below.
 Graph the demand curve and show indifference curves and budget lines
that are consistent with the demand schedule on the graphs below. Assume
that the good is normal.
 Show the substitution and income effects of a change in price from $25 to
$50.
Price
$50
$25
Quantity
10
40
Price
Consider the demand schedule below.
$50
Graph the demand curve and show indifference
curves and budget lines that are consistent with
the demand schedule on the graphs below.
Assume that the good is normal.
$25
Show the substitution and income effects of a
change in price from $25 to $50.
10
40
Quantity
Price
$50
$25
Quantity
10
40
All
Other
Goods
Substitution Effect
Income Effect
10
40
Good
Problem 1-2PM Class
 Consider a person with a $100 per week to spend on entertainment. Every week he
can either spend his budget going to the movies or drinking. A ticket to the movies
costs $10 and a drink at the local bar is $5.
 Draw his budget line and indifference curves if he buys 4 movie tickets per week and
spends the rest of his income at the local bar.
 Suppose his entertainment budget increased to $180 per week. Show the effect of
the increase in budget if movies are inferior and drinks are normal goods.
 Show the effect of the increase in budget if both movies and drinks are normal.
 Suppose the run down dingy old local bar is torn down and replaced by a brand new
fancy bar. Instead of drinking in the old dingy, dark, smelly bar, the new bar is well lit,
nicely furnished, has a huge dance floor and is well ventilated. Drinks in the new bar
are $10 vs. $5 in the old bar.
 What effect will this have on the person’s budget line between movies and drinks? Show
graphically.
 What effect will this have on the person’s indifference curves between movies and drinks.
Show graphically.
 Explain the effect on the person’s indifference curves using the concept of Marginal Rate of
Substitution.
 Show the dual effect of the change in the price of drinks and the construction of the new bar
assuming both movie tickets and drinks are normal.
 True, false, uncertain. Explain. The total expenditure on drinks will increase.
Consider a person with a $100 per week to
spend on entertainment. Every week he can
either spend his budget going to the movies or
drinking. A ticket to the movies costs $10 and a
drink at the local bar is $5.
Movies
Draw his budget line and indifference curves if
he buys 4 movie tickets per week and spends
the rest of his income at the local bar.
Suppose his entertainment budget increased to
$180 per week. Show the effect of the increase
in budget if movies are inferior and drinks are
normal goods.
18
Show the effect of the increase in budget if both
movies and drinks are normal.
10
normal
4
inferior
12
20
36
Drinks
Suppose the run down dingy old local bar is torn
down and replaced by a brand new fancy bar. Instead
of drinking in the old dingy, dark, smelly bar, the new
bar is well lit, nicely furnished, has a huge dance floor
and is well ventilated. Drinks in the new bar are $10
vs. $5 in the old bar.
Movies
18
What effect will this have on the person’s
budget line between movies and drinks? Show
graphically.
What effect will this have on the person’s
indifference curves between movies and drinks.
Show graphically.
Explain the effect on the person’s indifference
curves using the concept of Marginal Rate of
Substitution.
Show the dual effect of the change in the price
of drinks and the construction of the new bar
assuming both movie tickets and drinks are
normal.
True, false, uncertain. Explain. The total
expenditure on drinks will increase.
18
36
Drinks
Movies
8
Suppose the run down dingy old local bar is torn
down and replaced by a brand new fancy bar. Instead
of drinking in the old dingy, dark, smelly bar, the new
bar is well lit, nicely furnished, has a huge dance floor
and
welland
ventilated.
Drinksininthe
thenew
new bar are $10
Because the bar
is is
nicer
and drinking
vs. $5 inthe
thevalue
old bar.
bar is more enjoyable,
of drinks relative to
movies rise.
What effect will this have on the person’s
budget
and
This causes the slope
of theline
IC, between
the MRS movies
of drinks,
todrinks? Show
graphically.
rise.
What effect will this have on the person’s
indifference curves between movies and drinks.
Show graphically.
Explain the effect on the person’s indifference
curves using the concept of Marginal Rate of
Substitution.
Show the dual effect of the change in the price
of drinks and the construction of the new bar
assuming both movie tickets and drinks are
normal.
True, false, uncertain. Explain. The total
expenditure on drinks will increase.
8
16
Drinks
Suppose the run down dingy old local bar is torn
down and replaced by a brand new fancy bar. Instead
Change after rise of drinking in the old dingy, dark, smelly bar, the new
The
on drinks is given
in price
and expenditures
bar is well lit, nicely furnished, has a huge dance floor
by: of
construction
and is well ventilated. Drinks in the new bar are $10
new bar
vs. $5 in the old bar.
Movies
8
PdrinksQdrinks
What effect will this have on the person’s
The price of isbudget
staying
same.
line the
between
movies and drinks? Show
graphically.
This by itself would
cause no
What effect will
have on the person’s
change in expenditures
onthis
movies.
indifference curves between movies and drinks.
the Show
Q of graphically.
drinks bought is
Change after
rise in price
with old bar
However,
changing. TheExplain
net change
the effectin
ondrink
the person’s indifference
curves using the concept
of Marginal Rate of
purchases is indeterminate
because
Substitution.
the construction
of the new bar
Show the
dual effect of the
would cause drink
consumption
to change in the price
of drinks and
the construction
go up, the substitution
effect
of the of the new bar
assuming both movie tickets and drinks are
change in drink
prices would cause
normal.
the consumption of drinks to go
True, false, uncertain. Explain. The total
down, and theexpenditure
income effect
would
on drinks
will increase.
cause the consumption of drinks to
go down.
16 in
Therefore, the change
expenditures is indeterminate.
Drinks
Problem 2-2 PM
 Consider the demand schedule below.
 Graph the demand curve and show indifference curves and budget lines
that are consistent with the demand schedule on the graphs below. Assume
that the good is normal.
 Show the substitution and income effects of a change in price from $75 to
$10.
Price
$75
$10
Quantity
10
40
Price
Consider the demand schedule below.
Graph the demand curve and show indifference
curves and budget lines that are consistent with
the demand schedule on the graphs below.
Assume that the good is normal.
$75
$10
Show the substitution and income effects of a
change in price from $75 to $10.
10
40
Quantity
All
Other
Price
$75
$10
Quantity
10
40
Goods
Substitution Effect
Income Effect
10
40
Good
Exam Notes
Closed note. Closed book.
No Blue Book Required.
Calculator allowed. Memory must be
purged before exam.
Exam will emphasize basic understanding
of economic concepts and their application
to the real world plus the ability to engage
in economic analysis using the tools from
lecture and textbook.