This is a selection of sample problems from old quizzes, exams, the textbook, and textbook practice problems. This is not all encompassing and should not be used as a checklist of everything that may appear on the quizzes and exams.
Question 1 There are two goods: food and clothing. The price of food is $5 and the price of
clothing is $10. Income is $50. What would the consumers budget constraint equation be if the
a) she was charged a lump sum tax of $5;
b) she had an ad valorem subsidy of 4% on food;
c) she paid a 2 cent per unit tax on clothing.
Question 2 Suppose you have an income of $40 to spend on two commodities. Commodity 1 costs
$10 per unit, and commodity 2 costs $5 per unit.
a) Write down your budget equation.
b) If you spent all your income on commodity 1, how much could you buy
c) If you spent all of your income on commodity 2, how much could you buy? Use blue ink to
draw your budget line in the graph below.
d) Suppose that the price of commodity 1 falls to $5 while everything else stays the same. Write
down your new budget equation. On the graph above, use red ink to draw your new budget