ECO2103 Tutorial 5
ECO2103 Principles of Microeconomics
Tutorial 5
Question One
a) You are studying with a friend and your friend says "A budget line shows the various combinations of two goods that can be purchased with the buyer's income at current prices." Is your friend's assessment correct or not?
b) How is a budget line similar to a production possibilities frontier? How do they differ?
c) Why budget line has a negative slope? What does the slope of the budget line equal?
d) What is an indifference curve?
e) Why do consumers prefer higher indifference curves (farther to the right) to lower indifference curves?
f) In an indifference curve/budget line framework, how does a consumer decide which of all possible combinations of goods to purchase?
g) Describe the consumer equilibrium in the indifference curve/budget line model.
h) In a budget line/indifference curve figure, how do you identify the best affordable combination of any two goods?
i) What is the meaning of the term "marginal rate of substitution"?
j) What is the marginal rate of substitution and how does it relate to an indifference curve?
Question Two
a) Joe has $100 a week to purchase either computer online service or film for his other hobby, photography. The price of on-line service is $5 an hour while the price of film is $10 a roll. Draw Joe's budget line.
b) Suppose you have a $20 budget per week, the price of soda is $1 per bottle, and the price of pizza is $4 per slice. Draw a budget line for soda and pizza, placing soda on the horizontal axis.
c) John likes to spend Thursday nights playing pool and drinking soda. John's budget for Thursday nights is $10, a soda costs $2, and one game of pool costs $1.
i) Draw a graph of John's budget line in the figure above. ii) In your graph, label the affordable and unaffordable areas.
Possibility
Hamburgers (per day)
Hot dogs(per day)
A
0
8
B
1
6
C
2
4
D
3
2
E
4
0
d) The table above has different combinations of hamburgers and hot dogs that Alex can buy. After
Tutorial 5
Question One
a) You are studying with a friend and your friend says "A budget line shows the various combinations of two goods that can be purchased with the buyer's income at current prices." Is your friend's assessment correct or not?
b) How is a budget line similar to a production possibilities frontier? How do they differ?
c) Why budget line has a negative slope? What does the slope of the budget line equal?
d) What is an indifference curve?
e) Why do consumers prefer higher indifference curves (farther to the right) to lower indifference curves?
f) In an indifference curve/budget line framework, how does a consumer decide which of all possible combinations of goods to purchase?
g) Describe the consumer equilibrium in the indifference curve/budget line model.
h) In a budget line/indifference curve figure, how do you identify the best affordable combination of any two goods?
i) What is the meaning of the term "marginal rate of substitution"?
j) What is the marginal rate of substitution and how does it relate to an indifference curve?
Question Two
a) Joe has $100 a week to purchase either computer online service or film for his other hobby, photography. The price of on-line service is $5 an hour while the price of film is $10 a roll. Draw Joe's budget line.
b) Suppose you have a $20 budget per week, the price of soda is $1 per bottle, and the price of pizza is $4 per slice. Draw a budget line for soda and pizza, placing soda on the horizontal axis.
c) John likes to spend Thursday nights playing pool and drinking soda. John's budget for Thursday nights is $10, a soda costs $2, and one game of pool costs $1.
i) Draw a graph of John's budget line in the figure above. ii) In your graph, label the affordable and unaffordable areas.
Possibility
Hamburgers (per day)
Hot dogs(per day)
A
0
8
B
1
6
C
2
4
D
3
2
E
4
0
d) The table above has different combinations of hamburgers and hot dogs that Alex can buy. After