ECON 204 MICROECONOMICS – HOMEWORK 1Date due: October 12, 2016, in class.1. (5 points) If prices are p1 = 5 and p2 = 3, give an example of a commodity bundle which you cannot afford with income m =...

ECON 204 MICROECONOMICS – HOMEWORK 1Date due: October 12, 2016, in class.1. (5 points) If prices are p1 = 5 and p2 = 3, give an example of a commodity bundle which you cannot afford with income m = 300TLs. What is the cost of your examplebundle?2. (10 points) Calculate the subsidy rate ? (“sigma”) on good 1 such that the example bundle you gave in question 1 becomes just affordable (the price you pay for good 1thus becomes (1 – ?) p1 and the commodity bundle then lies on your budget line).3. (15 points) The government imposes a value added tax (VAT) on good 1, at the rate ? percent. Draw your budget line under this VAT and pick a point (denote it X) on thatline to represent your best choice. If, instead of VAT the government takes an incometax T from you, how will your budget line change? Draw it on the same figure. Bylooking at point X and the budget lines, can you tell whether you prefer the income taxor the VAT? Explain why.4. (40 points) The government offers Ali a food stamp for 75 TLs, with which he can buy 200 TLs food. If he buys it, Ali cannot sell the food stamp to others. Denote the priceof food by pF. Call the second good, “expenditures on all other goods” which thereforeis priced p2 = 1.(i)What quantity of food does this stamp buy (as a function of pF)? What is the foodprice for Ali when he buys 200 TLs of food, paying only 75 TLs (as a function ofpF)? Therefore, how much this stamp is subsidizing Ali per unit of food he buys?(ii)Put food on the horizontal axis, good 2 on the vertical axis and draw a budget linefor Ali, with m = 1000, when he does not buy the food stamp. Indicate the valuesof the intercepts of the budget line with each axis (the intercept could be a numberor may depend on pF.)(iii)Draw Ali’s budget line when he buys the food stamp. On your figure, indicateclearly the new budget set of Ali (the set of bundles he can consume).(iv)Answer the same question above (draw budget line and set), assuming that Ali cansell the entire food stamp to somebody else.(v)Answer the same question (draw budget line and set), assuming that Ali buys thefood stamp and gives it for free to his friend in need of food.5. (10 points) Giving up 2 slices of dark bread to get 5 slices of white bread leaves me indifferent, under all circumstances. Draw my indifference curve.6. (10 points) I always consume 5 spoons of cereal with 4 spoons of milk. More of any of the two goods outside the 4-to-5 proportion does not change my satisfaction. Draw myindifference curve.7. (10 points) Draw indifference curves for preferences that are rational (complete, reflexive, transitive) and convex, but not monotonic.