1. Consider the budget constraint depicted in the following graph: Y BC X Which of the following scenarios best matches the graph? [10%] a) After consuming X units of X, the price of X drops. b) After consuming X units of X, the price of X rises. c) The government transfers X units of X to the consumer. After that level, a per unit tax (t) is applied on X. d) The government taxes good X on all units up to X. After that, the tax is removed. e) If you buy one unit of X, you get one unit free. 2. Say you need to solve the consumer choice problem for an individual with the following utility function, U(X, Y) = X0.5Y0.5, facing the following budget equation: PxX + PyY = m. True or False? "Without loss of generality, you can assume that Px = 1." Explain your answer in one or two sentences. [20%] 3. Say that Yidan must divide her consumption between two periods: consumption "today" (C1) and consumption "tomorrow" (C2). If I tell you that Yidan prefers to smooth her consumption over time, what can you conclude about her preferences over C1 and C2? [10%] a) They are rational b) They are strictly monotonic c) They are strictly convex d) They are complete e) They are Cobb-Douglas preferences