Exercise 1. Consider a two- good consumption problem. A consumer has no income, but has initial endowments w1 and w2 of the two goods. Assume that this consumer can buy and sell amounts of the two goods at fixed prices p1, p2 > 0.(i) Write down the consumer s budget constraint, and sketch the correspondingbudget set. Carefully identify all relevant points and lines on your graph. Describe the relevant budget set using appropriate set notation.(ii) Using appropriate graphs, explain how the budget set derived in part (i) changesas a function of w1. w2, p1 and p2.
Exercise 1. Consider a two- good consumption problem. A consumer has no income, but has initial endowments w1 and w2 of the two goods. Assume that this consumer can buy and sell amounts of the two goods at fixed prices p1, p2 > 0.(i) Write down the consumer s budget constraint, and sketch the correspondingbudget set. Carefully identify all relevant points and lines on your graph. Describe the relevant budget set using appropriate set notation.(ii) Using appropriate graphs, explain how the budget set derived in part (i) changesas a function of w1. w2, p1 and p2.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Exercise 1. Consider a two- good consumption
problem. A consumer has no income, but has initial
endowments w1 and w2 of the two goods. Assume that
this consumer can buy and sell amounts of the two
goods at fixed prices p1, p2 > 0.(i) Write down the
consumer s budget constraint, and sketch the
correspondingbudget set. Carefully identify all relevant
points and lines on your graph. Describe the relevant
budget set using appropriate set notation.(ii) Using
appropriate graphs, explain how the budget set derived
in part (i) changesas a function of w1. w2, p1 and p2.
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