1.

value:

0.30 points
A consumer must divide $600 between the consumption of product X and product Y. The relevant
market prices are Px = $10 and Py = $40.
a. Write the equation for the consumers budget line.
Instruction: If the coefficient on X is a negative number, enter a negative number as your answer.
Y=

+
15

X
-0.25

b. In the graph below, illustrate the consumers opportunity set.

Instruction: Use the tool provided 'Original Budget Set' to graph the opportunity set from where X =
0 to where Y = 0.
c. In the same graph, Illustrate the consumers opportunity set when the price of good X increases to
$20.
Instruction: Use the tool provided 'Budget Set with Px = $20' to graph the opportunity set from
where X = 0 to where Y = 0.
How does this change alter the market rate of substitution between goods X and Y?
It changes from -2 to -4.
It changes from -4 to -2.
It changes from -0.5 to -0.25.
It changes from -0.25 to -0.5.

2.
value:

0.30 points
A consumer must spend all of her income on two goods (X and Y). In each of the following
scenarios, indicate whether the equilibrium consumption of goods Xand Y will increase or decrease.
Assume good X is a normal good and good Y is an inferior good.
a. Income doubles.
Nothing will happen to the consumption of either good.
Consumption of good X will increase and consumption of good Y will increase.

Consumption of good X will increase and consumption of good Y will decrease.

Consumption of good X will decrease and consumption of good Y will increase.

b. Income quadruples and all prices double.

Consumption of good X will decrease and consumption of good Y will decrease.
Nothing will happen to the consumption of either good.
Consumption of good X will decrease and consumption of good Y will increase.
Consumption of good X will increase and consumption of good Y will decrease.

c. Income and all prices quadruple.

Nothing will happen to the consumption of either good.
Consumption of good X will decrease and consumption of good Y will increase.
Consumption of good X will increase and consumption of good Y will increase.
Consumption of good X will increase and consumption of good Y will decrease.

d. Income is halved and all prices double.

Consumption of good X will increase and consumption of good Y will decrease.
Consumption of good X will decrease and consumption of good Y will increase.
Nothing will happen to the consumption of either good.
Consumption of good X will decrease and consumption of good Y will decrease.

3.
value:

0.30 points
The U.S. government spends over $33 billion on its Food Stamp Program to provide millions of
Americans with the means to purchase food. These stamps are redeemable for food at over 160,000
store locations throughout the nation, and they cannot be sold for cash or used to purchase nonfood
items. The average food stamp benefit is about $284 per month. Suppose that, in the absence of
food stamps, the average consumer must divide $600 in monthly income between food and all other
goods such that the following budget constraint holds: $600 = $12A + $4F, where A is the quantity
of all other goods and F is the quantity of food purchased. Using the graph below, draw the
consumers budget line in the absence of the Food Stamp Program. On the same graph, show the
budget line with the Food Stamp Program.
Instruction: If the budget line has any kinks, be sure to plot all the points where the kinks occur in

addition to the points where the line crosses the intercepts. Graph both budget sets from where
Food = 0 to where they cross the X-axis.
What is the market rate of substitution between food and all other goods for the budget line without
the Food Stamp Program?
Instruction: Round your answer to two decimal places.
-0.33

With the Food Stamp Program in place, would this consumer benefit from illegally exchanging food
stamps for cash?
No - he/she cannot benefit from illegal exchange of food stamps.
Yes - illegally exchanging food stamps for cash will definitely make him/her better off.
Possibly - depending on his/her preferences.

A recent study by Web Mystery Shoppers International indicates that holiday gift cards are becoming
increasingly popular at online retailers. Two years ago, online shoppers had to really hunt at most eretailers sites to purchase a gift certificate, but today it is easier to purchase gift cards online than at
traditional retail outlets.
Is there reason to believe online gift cards are merely a fad?
Yes - retailers and consumers will soon realize they provide no benefits.
No - although they are costly for retailers, consumers benefit from them.
Yes - although retailers benefit from them, consumers will soon stop buying them.
No - retailers and consumers clearly benefit from them.

A large Coca Cola vendor recently hired some economic analysts to assess the effect of a price
increase in its 16 ounce bottles from $1.50 to $2.00. The analysts determined that, on average, the
vendors customers spend about $17.00 on soda (Coke and all other brands) each week, and the
average price for other 16-ounce soda bottles is $1.50. The analysts also utilized some focus groups
to determine the preferences of the vendors customers. They used this analysis to build the
following graph:
Suppose X0 = 8 and X1 = 5. Should the vendor expect to sell 5, more than 5, or less than 5 bottles of
Coke after raising the price to $2.00 if Coke is a normal good?
The vendor should expect to sell more than 5 bottles of Coke.
The vendor should expect to sell less than 5 bottles of Coke.

The vendor should expect to sell 5 bottles of Coke.