Nir Dagan / Teaching

Problem set 1 of Economic Theory I

Nir Dagan, Esther Hauk, and Albrecht Ritschl

Due Monday, 20 April, 1998

1. The initial budget constraint is: p1x1 + p2x2 = m

1.1. If the price of good 1 is multiplied by 3, of good 2 by 5, and the income is multiplied by 4, what is the new budget constraint?

1.2. Can you say that in the new budget constraint the consumer is richer? Explain your answer?

2. Assume that you have 20 dollars and 5 hours. Viewing a movie costs 5 dollars and takes 2 hours. You can leave a movie in the middle but you must buy tickets in integers. Visiting a strip club has an entry fee of 10 dollars, and you can stay as long you like.

2.1. Write and draw the budget constraint assuming that the goods are hours in the movies and hours in the strip club.

Hint: note that both time and money are limited.

3. Assume now, that the government decides to subsidize (Catalan) movies, and tax strip clubs. (As in question 2 above)

Assume now that you are charged a strip tax of 2 dollars per hour in the strip club, and pay less t>0 dollars per movie.

3.1. What is the new budget constraint?

3.2 Are there values of t for which the government can be sure that you are better off? If so, what are they?