Intermediate Microeconomics Hal Varian Chapter 2

2. BUDGET CONSTRAINT

1. The doubling in the price of good 1 and good 2 will be absorbed in the change in
income. However, the subsequent quadrupling of the price of good 2 will cause the
budget constraint to pivot inwards with the pivot on the x-axis. The doubling of
income will shift the budget constant outwards.
2. The budget constant pivots inwards, causing a lower-valued y-intercept.
3. The price of good 2 increases by proportionally more than the price of good 1 so the
budget constraint will become flatter.
4. A numeraire good is a good whose price is pegged to 1 when deducing the effects of
changes in price or income
5. The net tax will be 8 cents a gallon.
6. The lump sum tax will decrease income by u. Each quantity subsidy will decrease the
price of the good by s. Hence the new budget line will be (p 1 – s)x1 + (p2 – s)x2 = m – u
7. The increase in the income of the consumer will cause them to necessarily be at least
as well-off. If the consumer happens to favour the good whose price was reduced,
that will make them even more well-off. However even if the consumer isn’t affected
by the price reduction at all, their budget set will have increased.