1. Suppose Mike Myers consumes only leather jackets and guitars. He has an income of $10,000. Jackets cost $400 each, while the price of guitars is $2,000 each. On a graph (which you will draw in the provided space below) show separately how each of the following changes affects Mike's budget line.
On your graph, put jackets on the horizontal axis and guitars on the vertical axis. Treat each of the following situations separately, and label your graphs carefully.
(a) Write the equation of the budget constraint; plot and label it on the above graph.
(b) Due to an increase in sales of Mini-Me dolls, Mike's income increases by 20%. Write the equation of the budget constraint and plot it.
(c) (b) Due to the eminent retirement of Eric Clapton, the price of guitars increases by $500 each, (even the unsigned ones). Write the equation of the budget constraint and plot it.
(d) (c) Mike's income increases by 20%, the price of guitars increases by $1,000, and the price of jackets decreases by $100, all at the same time. Write the equation of the budget constraint and plot it.
2. In the graph below for two different goods, Y and Z, there are two of the consumer's indifference curves, I1 and I2, and two budget constraints, B1- the original budget constraint, and B2- the budget constraint after the indicated price change (the line tangent with I2 at point B).
Answer the following questions with respect to this information.
(a) Indicate the change in the quantity of Y demand as a result of the indicated change in the price of P (in terms of Y
YA, YB, Yc
(b) Indicate what portion of the change corresponds to the income effect and what part corresponds to the substitution effect (in terms of YA, YB, Yc; ZA, ZB, ZC).
(c) Is Y an inferior good? Why?
(d) Is Z a substitute good for Y? Why?
Q3. Consider the decisions of Batman and Iron Man. They are each deciding about how much to work versus how much time they want to spend keeping their respective cities safe (assume Batman can earn only $200/hour while Iron Man can earn $500/hour in his profession). They each have 18 hours per day that they can allocate between crime fighting and work. Currently, it is optimal for Batman to spend 4 hours working per day, earning him $800. He then spends 14 hours patrolling Gotham City and fighting crime. For Iron Man, on the other hand, it is currently optimal for him to spend 12 hours working every day, and then 6 hours fighting evil. The superhero union to which they both belong sees that Batman is earning less, causing him to deplete his reserves and threatening the job of Alfred, his long-time butler, while Iron Man is building up millions of dollars annually. In an attempt to ease the financial pain of Batman, the union institutes an income redistribution program. The income earned by Iron Man will be split, such that for every hour he works, he will receive $300 and Batman will receive $200.
(a) What do you expect to happen to the number of hours each spends working in his day job?
Suppose that in response to the new policy, Batman still works 4 hours per day but Iron Man now works 8 hours per day.
(b) What is the total income of each superhero with the income redistribution?
(c) Graph the labor supply curve for Iron Man.
(d) Suppose that instead of decreasing his hours of work from 12 to 8 hours per day after the policy is implemented, Iron Man increases his hours worked to 14 hours per day. Draw Iron Man's budget constraint and optimal consumption bundles before and after the policy change. What would be the explanation for his increase in hours worked as a result of the policy change in terms of income and substitution effects?
(e) What would be a possible graph of Iron Mans labor supply curve under the scenario described in part (d)?