Microeconomics Tutorial Questions & Answers

ECON 200 1 : Intermed'iate Microeconomics
Course u;ork ererci;ses Term 2

trtorial 1: Budget constraints
(Not to tre submitted)
Part A
1. Which of the following statements is untrue? Briefly justify your answer
'fv'tt t:
(") It is not possible for all goocls to be luxuries. Ss*q{l
(b It is not possible for all goods to be necessities. *'W- 'tm'o-i f u{
is not possible fbr all goods to be norma]. * t',P,'t-
(d) It is not possible for all goods to be inf'erior. * ,/u:t{
2. A consurner has Nlarshallian demands for goods ei, i : 1, -.. ,fr given by piQt : ai l A,;A * 1t!t2
where p; where pt, e : 1,....n denotes the prices ancl g is total budget. \Vhich of the foliowing
restrictions is required by adding up? Briefly justifr' \-our ans\ver.
(u) Io -0,L"frr:0, !rn :0
ai.
(b) I, cu : t,Lo 0t :0, If; : 0
I;o;:0,f;d;-1,E,T,:0
L;,v, - 1.L, .J, : 0. I, .; : 1


Part B
1. Ilternet access in a particulal alea is priced as follows.The charge is 11 per hour for the first 20
liours per month and 50p per horu after that. There is also a monthlv subscription fee of f.10
which is u'aived if the consunrer spends rnore than l-40. What does a typical consumer's budget
constraint betteen liours of internet access r and other goocls y look like? How is choice likelv to
be affected b1'the nonlinearities in the budget consLraint?

2. A new university has fgm to spend orr research r and other a,ctivities g, of which it curreltlv
plans to spend I3m orr research. Its funding body corrsiders the follo.n'ing plans in an attempt to
encourage research.
Plan A: Increase the funding unconditionally to El2n.
Plan B: Increase the funding to an unconditional fgrn plus an adclitional f3m if and only if the
university spends at least f6m on research.
Plan C: Increase the funding to an unconditional lgrn plus half of whatever the university spends
on research.
Find expressions for the buclget sets faced by the university under each plan ancl sketch them.
The university's preferences over bundles (r,g) are such that it rnould choose to spen<l corstant
budget shares of ] and ] on r and g uncler any linear budget corrstraint. What bundle will the
university choose for ea,ch of the plans? Which plan resnlts in rnost being spent on research? lVhich
plan results in the funriing bodv providing lowest funding?




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