Econ 2000 - Problem Set 3

Econ 2000 Problem Set 3 (c) Is Amy indifferent between the housing assistance program and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer. 5. Janice Doe consumes two goods, X and Y. Janice has a utility function given by the expression: U = 4 X 0 . 5 Y 0 . 5 So, MU X = 2 Y 0 . 5 X 0 . 5 and MU Y = 2 X 0 . 5 Y 0 . 5 . The current prices of X and Y are 25 and 50, respectively. Janice currently has an income of 750 per time period. (a) Write an expression for Janice’s budget constraint. (b) Calculate the optimal quantities of X and Y that Janice should choose, given her budget cons- traint. Graph your answer. (c) Suppose that the government rations purchases of good X such that Janice is limited to 10 units of X per time period. Assuming that Janice chooses to spend her entire income, how much Y will Janice consume? Is Janice satisfying the usual conditions of consumer equilibrium while the restriction is in effect? (d) Calculate the impact of the ration restriction on Janice’s utility. 6. (a) The San Francisco Chronicle reported that the toll on the Golden Gate Bridge was raised from 2 to 3. Following the toll increase, traffic fell by 5 percent. Based on this information, calculate the point price elasticity of demand. Is demand elastic or inelastic? Explain. (b) Stephen Leonoudakis, chairman of the bridge’s finance auditing committee, warned that the toll increase could cause toll revenues to decrease by $2.8 million per year. Is this statement consistent with economic theory? Explain. Econ 2000 Problem Set 3 3 / 4