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Chapter 6: Q.4 (page 151)

As a college student you work at a part-time job, but your parents also send you a monthly 鈥渁llowance.鈥� Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?

Short Answer

Expert verified

When my parents forget to send me a check as a college student, my income drops for the period, and my financial limitation shifts to the left. My basket of goods will be reduced in size.

Step by step solution

01

Step 1:Definition

Consumer choices:

People's choices about products and services are referred to as consumer choices. When we study consumer choice behavior, we examine how consumers make long-term decisions about what to buy or consume.

02

Step 2:Explanation

This is an income effect that is negative.

From the graph, Your monthly income is lower than usual as a result of your parents' cheque not arriving, and your budget constraint shifts back toward the source. If you simply buy everyday items, a decrease in your income means you'll buy fewer of them.

03

Step 3:Conclusion

Therefore, my income reduces for the period when my parents neglect to give me a check as a college student, and my financial limitation swings to the left.

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Most popular questions from this chapter

Maude鈥檚 labor-supply curve slopes upward if, for Maude,

  1. leisure is a normal good

  2. consumption is a normal good

  3. the income effect on leisure exceeds the substitution effect.

  4. the substitution effect on leisure exceeds the income effect.

Maya divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.

a. Show the effect of the frost on Maya鈥檚 budget constraint.

b. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the substitution effect outweighs the income effect for croissants.

c. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the income effect outweighs the substitution effect for croissants.

1. Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \(2 in gasoline money. He has a total of \)10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points on Jeremy鈥檚 consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.

What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizing.

Consumption when young and consumption when old are both normal goods for Seymour, a worker saving for retirement. When the interest rate falls, what happens to Seymour鈥檚 consumption when old?

a. It definitely increases.

b. t definitely decreases.

c. It increases only if the substitution effect exceeds the income effect.

d. It decreases only if the substitution effect exceeds the income effect.
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