ECON 356

In Class Exercise Four

1.  Assume that Poppy is a student struggling to make ends meet.  His income is $12,000 year.  With this income he purchases 40 units of hamburger and spends the rest of his income on other goods.  The price of hamburger is $2 per unit.  a.  Draw Poppy's budget constraint and indifference curve.  Label everything.

b.  Poppy's parents decide to supplement his income by $2,000.  With this increase, he increases his consumption of hamburger to 50 units.  Show this on your graph.

c.  Poppy wins a jackpot at the casino that increases his income to $30,000.  His consumption of hamburger decreases to 20 units.  Show this on your graph.

d.  Draw Poppy's income-consumption curve on your graph.

e.  Plot Poppy's Engel's Curve -- show all numbers.

e.  Is hamburger, in this example, a normal or inferior good -- explain your answer.

2.  Assuming that the price of apples decreases -- derive the demand curve for apples by first showing the price decrease with a budget constraint and indifference curves in each of the following cases:

a.  Apples are a normal good.

b.  Apples are an inferior good.

c.  Apples are a Giffen good.