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Assignment 3

The document provides instructions for solving assignments related to microeconomics concepts. It outlines several key points: 1) Students should first review related materials before attempting assignment problems independently, only discussing with peers if stuck. 2) The goal is for students to understand concepts and apply them independently after submitting assignments. 3) Unannounced quizzes or in-class problems may occur, so students should be prepared. 4) Assignments are intended to prepare students for exams which will focus on learning from assignments. 5) Students can discuss assignments but must submit their own independent work, as copying will result in failure. 6) Practice is essential, and there are no shortcuts - assignments

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43 views3 pages

Assignment 3

The document provides instructions for solving assignments related to microeconomics concepts. It outlines several key points: 1) Students should first review related materials before attempting assignment problems independently, only discussing with peers if stuck. 2) The goal is for students to understand concepts and apply them independently after submitting assignments. 3) Unannounced quizzes or in-class problems may occur, so students should be prepared. 4) Assignments are intended to prepare students for exams which will focus on learning from assignments. 5) Students can discuss assignments but must submit their own independent work, as copying will result in failure. 6) Practice is essential, and there are no shortcuts - assignments

Uploaded by

mananpatel15124
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Instructions

• Please solve the following assignments.

• You can discuss assignment among yourselves but you have to write your own an-
swer. A good way to approach the assignment is to first go through the related read-
ing/concepts/chapters mentioned in the assignment. Then try the assignment problems on
your own. Only when you couldn’t understand the problem or how to approach the problem,
discuss with you peer and get the hint/approach. The end objective is that you understood
the related concepts and how to apply them.

• My expectation is that once you have submitted the assignment, you understood the concept
and you can solve all the problems of assignment on your own.

• Frequently, I take surprise quizzes or ask you to solve assignment/related problems


in the class itself. Be prepared! :D

• Also, take this assignment in a way that the quizzes, in-semester exams and end-term exam
will be primarily on the learning from the assignments.

• You are allowed (and even encouraged to discuss within yourselves) but you are not allowed
to copy from the other’s answer/working sheet. Any copying will be severely penalized (F
grade).

• Practice is only key. There are no shortcuts. How well (and honestly) you have learned and
practice the assignments will reflect in continuous assessment: in-class questions/discussions,
quizzes, in-semester exams, end-term exam, viva, etc.

• All the best! :)

1
1 Introduction
Assignment 1
1. Discuss the Circular flow diagram of economy. (Hint: Refer Mankiw’s Principles of Microeoc-
nomics chapter 2)

2 Theory of Consumer Choice, Demand and Supply


Assignment 2: Budget Constraint
Note: Read/refer Hal Varian’s [HV] Intermediate microeconomics chapter 2 (Budget Constraint).
Additionally, one can read Pindyck-Rubinfeld [PR], section 3.2 (Budget Constraints). The assign-
ment is based on these concepts. If one has been attentive in class and understands this chapter,
it should not take more than 1 to 1.5 hours to read. Furthermore, solving this assignment should
roughly take around 1 hour.
1. Originally the consumer faces the budget line p1 x1 + p2 x2 = m. Then the price of good
1 doubles, the price of good 2 becomes 8 times larger, and income becomes 4 times larger.
Write down an equation for the new budget line in terms of the original prices and income.
Also, draw the original and final budget line.
2. Originally the consumer faces the budget line p1 x1 + p2 x2 = m. What happens to the budget
line if the price of good 2 increases, but the price of good 1 and income remain constant?
Also, draw the original and final budget line.
3. Originally the consumer faces the budget line p1 x1 + p2 x2 = m. If the price of good 1 doubles
and the price of good 2 triples, does the budget line become flatter or steeper? Also, draw
the original and final budget line.
4. Suppose that the government puts a tax of 15 cents a gallon on gasoline and then later
decides to put a subsidy on gasoline at a rate of 7 cents a gallon. What net tax is this
combination equivalent to?
5. Suppose that a budget equation is given by p1 x1 + p2 x2 = m. The government decides to
impose a lump-sum tax of u, a quantity tax on good 1 of t, and a quantity subsidy on good
2 of s. What is the formula for the new budget line? Draw the original and final budget line
in one plot.
6. If the income of the consumer increases and one of the prices decreases at the same time,
will the consumer necessarily be at least as well-off?

Assignment 3: Preferences, Indifference Curve, Marginal rate of Sub-


stitution (MRS), Utility, Choice
Note: Read/refer Hal Varian’s (HV) Intermediate Microeconomics Chapter 3 (Preferences), Chap-
ter 4 (Utility), Chapter 5 (Choice). The assignment is based on that.

1. Consider a group of people A, B, C and the relation “at least as tall as,” as in “A is at least
as tall as B.” Is this relation transitive? Is it complete?
2. Take the same group of people and consider the relation “strictly taller than.” Is this relation
transitive? Is it reflexive? Is it complete?

2
3. Explain why convex preferences means that “averages are preferred to extremes.”

4. Which of the following are monotonic transformations? (i) u = 2v-13; (ii) u = −1 v2


; (iii) u =
1 −v 2 2 2
v2
; (iv) u = ln v; (v) u = -e ; (vi) u = v ; (vii) u=v for v>0;(viii) u=v for v<0.

5. √
What kind of preferences are represented by a utility function of the form u(x1 , x2 ) =
√
x1 + x2 ? What about the untility function v(x1 , x2 ) = x21 +2x1 x2 +x2 a monotonic trans-
formation of u(x1 , x2 )?
√
6. Consider the utility function u(x1 , x2 ) = x1 x2 . What kind of preferences does it represent?
Is the function v(x1 , x2 ) = x21 x2 a monotonic transformation of u(x1 , x2 )? Is the function
w(x1 , x2 ) = x21 x22 a monotonic transformation of u(x1 , x2 )?

7. Suppose that a consumer always consumes 2 spoons of sugar with each cup of coffee. If the
price of sugar is p1 per spoonful and the price of coffee is p2 per cup and the consumer has
m dollars to spend on coffee and sugar, how much will he or she want to purchase?

8. * If a consumer has a utility function u(x1 , x2 ) = x1 x42 , what fraction of her income will she
spend on good 2?

9. * (Note: Refer HV section 5.6, Choosing Tax) If the government wants to raise a certain
amount of revenue, is it better to raise it via a quantity tax or an income tax? Illustrate.

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