Question

7. Please answer the following questions

(1)Suppose John is planning to join a sports club. Membership in the club will allow John to swim at the pool for half price. Normally swimming for an hour would cost $10. If John has an income of $1000, the club membership fee is $100, and we plot the number of visits to the pool on the horizontal axis and a composite "other goods" which have a price of $1 on the vertical axis, the equation of John's budget line after joining the club, where the composite good, y, is on the vertical axis and pool visits, x, are measured on the horizontal axis is

A	y = 900 – 5x
B	y = 1000 – 5x
C	y = 1000 – 10x
D	y = 900 – 10x

(2)

Suppose a consumer buys two goods x and y has an income of $30. Initially, Px = 3 and the consumer chooses basket A with x = 2 and y =8. The prices change to Px = 4 and Py = 2 and the consumer chooses basket B with x = 7 and y = 1.

A	These choices are consistent with utility maximization.
B	These choices are not consistent with utility maximization.
C	With this information, it is not possible to determine if these choices are consistent with utility maximization.
D	Basket B must be strictly preferred to basket A.

(3)

When the price of gasoline is $2.00 per gallon, Joe consumes 1,000 gallons per year. The price increases to $2.50, and to offset the harm to Joe, the government gives him a cash transfer of $500 per year. This will make Joe worse off after the price increase and cash transfer than he was before.

	True
	False

Answer 1

1. Ans is D

Y=900-10X. Because out of 1000, 100 are paid as a membership charge/fee.

2. Ans is B

Initially price of Y=(30-6)/8=3. Then X=2 and Y=8

When price of X increases to 4 then demand of X increases from 2 to 8

and when price of y decreases from 3 to 2, demand of Y decreases to 2.

Thus both X And Y are Giffen good which is not possible. Thus choices are not consistent with utility maximisation

3.false. When price increases and $500 is given back in cash Transfer then joe can consume initial bundle as well as new options are available. Thus consumer is better off