Chapter 4: Q2LO (page 154)
Illustrate how changes in prices and income impact an individual’s opportunities.
Changes in income and prices create a direct impact on an individual's opportunities.
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A large Coca-Cola vendor recently hired some economic analysts to assess the effect of a price increase in its-ounce bottles fromto \(2.00. The analysts determined that, on average, the vendor’s customers spend abouton soda (Coke and all other brands) each week, and the average price for other-ounce soda bottles is. The analysts also utilized some focus groups to determine the preferences of the vendor’s customers. They used this analysis to build the following graph:
Suppose. Should the vendor expect to sell 7, more than 7, or less than 7bottles of Coke after raising the price toif Coke is a normal good?
A common marketing tactic among many liquor stores is to offer their clientele quantity (or volume) discounts. For instance, the second-leading brand of wine exported from Chile sells in the United States for per bottle if the consumer purchases up to eight bottles. The price of each additional bottle is only . If a consumer has to divide between purchasing this brand of wine and other goods, graphically illustrate how this marketing tactic affects the consumer’s budget set if the price of other goods is . Will a consumer ever purchase exactly eight bottles of wine? Explain.
In the answer to Demonstration Problem 4–2 in the text, we showed a situation in which a gift certificate leads a consumer to purchase a greater quantity of an inferior good than he or she would consume if given a cash gift of equal value. Is this always the case? Explain?
The U.S. government spends overbillion on its Food Stamp program to provide millions of Americans with the means to purchase food. These stamps are redeemable for food at overstore locations throughout the nation, and they cannot be sold for cash or used to purchase non-food items. The average food stamp benefit is aboutper month. Suppose that, in the absence of food stamps, the average consumer must dividein monthly income between food and “all other goods” such that the following budget constraint holds:,where Ais the quantity of “all other goods” and Fis the quantity of food purchased. Using the vertical axis for “all other goods,” draw the consumer’s budget line in the absence of the Food Stamp program. What is the market rate of substitution between food and “all other goods”? On the same graph, show how the Food Stamp program alters the average consumer’s budget line. Would this consumer benefit from illegally exchanging food stamps for cash? Explain.
A consumer’s budget set for two goods (Xand Y) is
a.Illustrate the budget set in a diagram.
b.Does the budget set change if the prices of both goods double and theconsumer’s income also doubles? Explain.
c.Given the equation for the budget set, can you determine the prices of the two goods? The consumer’s income? Explain.
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