1. What determines if a consumer chooses to consume the market basket X instead of market

basket Z? They both cost Y $, the consumer's income.

3. Suppose a subject's willingness to pay for consumption of a first unit is $40, for a second unit

$30, and for a third unit $15. Say I give them 3 units to consume and charge them $10 for each unit. How much more than $30 would are subject be willing to pay me for those 3 units. Explain.

5. The price of good 1 is $100 and the price of good 2 is $20. How many units of good 1 would

have to pass on consuming in order to increase my consumption of good 2 by 1 unit?

6. Draw a budget line. Show what happens to it if the consumer's income goes up and at the

same time, the price of good 2 goes down. Think this way: income goes up and then the price of good 2 goes down.

9. Say the own price elasticity of good 1 is - 1.5. Suppose its elasticity with respect to average

consumer income is 2. If the price of good 1 increases by 10% and average consumer income goes up by 3.5%, what would happen to the quantity of good 1 demanded, percentage-wise?

Answer: the quantity demanded goes down by 8%. Figure that out. How? Here's the rule you follow. If something x changes when y and z change, then the change in x when y and z change is roughly equal to the change caused by the change in x plus the change caused by the change in z. So you know how to figure the percentage change from the price change, and the change from the change in income. Add them.

10. Consumer #1 and #2 have the same incomes and face the same prices. Would they choose to

consume the same market basket? Why or why not?

11. Suppose that due to a unit tax of $10 a barrel on beer, the price of a barrel of beer goes up by

$10. Before the price increase, 1.5 million barrels were sold. After the price increase, 1.25 million barrels are sold. What is the cost of this tax to consumers? Use those numbers to calculate the cost in dollars.

12. A consumer's marginal willingness to substitute is 3. I propose this trade is to them: give me

2 units of good 2 and I'll give you 1/2 unit of good 1.Would this individual take me up on the trade of not? Why? Hint: MWS is a rate; it tells you how much good 2 the person will give up PER unit of good 1 given to them, i.e. how much that'd give up for each UNIT.

13. We think that the consumer's MWS decreases as what happens? Why do we think that way?

14. Suppose a consumer is consuming the market basket (20, 40). The price of good 1 is $5 and

the price of good 2 is $10. Saw the price of good 2 goes down, to $8. And suppose at the same time, the consumer's income falls, to $420. What does out theory of consumer behavior say this consumer will do? That is, how will the quantities of the two goods they demand change? Hint: Apply what is discussed in the notes REVNOTESanexperiment.

15. Say the supply of a good is fixed for a period of time, meaning that the quantity of the good

that firms wish to sell doesn't change as the price of the good changes.What happens to price if in the next period, the fixed quantity supplied goes up? How would you figure the percentage change in price that would result if supply went up by, say, 8%?