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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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 must divide between the consumption of productand product. The relevant market prices are
a.Write the equation for the consumer’s budget line.
b.Illustrate the consumer’s opportunity set in a carefully labelled diagram.
c.Show how the consumer’s opportunity set changes when the price of goodincreases to. How does this change alter the market rate of substitution between goodsand?
A recent newspaper circular advertised the following special on tires: “Buy three, get the fourth tire for free—limit one free tire per customer.” If a consumer has to spend on tires and other goods and each tire usually sells for, how does this deal impact the consumer’s opportunity set?
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?
Illustrate how “buy one, get one free” deals and gift certificates impact a consumer’s purchase decisions.
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