Tutorial assignment 4 Due week 5 at the beginning of your tutorial 1. Suppose that two goods are...

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Tutorial assignment 4 Due week 5 at the beginning of your tutorial 1. Suppose that two goods are perfect complements. If the price of good 1 changes what part of the change in demand is due to the substitution effect and what is due to income effect? 2. In 2007 many households fixed their mortgage rates for the duration of the mortgage. Early in 2008 the nominal interest rate elsewhere increased so that those who stayed with the floating mortgage rate face now higher interest rates on their mortgage. Suppose the inflation rate stayed fixed. Show on an intertemporal consumption space graph how this increased the well being of those who has fixed their mortgage rates. 3. A murder has been committed. The only clue is a grocery receipt left at the scene by the murderer. The receipt shows that 20 bags of chips selling for $2 a bag and 10 six-packs of pop selling for $6 per sixpack were bought on that day. There are two suspects: Colonel Mustard and Miss Scarlet. On searching their apartments, you find suspects’s grocery bills for the previous week. Las week chips were $3 a bag and pop was $5 a six-pack. Colonel Mustard bought 20 bags of chips and 13 packs of pop at those prices. Miss Scarlet bought 30 bags of chips and 7 packs of pop at those prices. Supposing that these people have convex and smooth indifference curves, can any of these people be the murderer? Hint: think in terms of Giffen/ordinary and income inferior/normal goods. 4. You are born with no tangible assets. You live for three periods out of which you work for two periods and retire for one period before you die. You plan to live nothing for your heirs, and you expect your working income to be $20 000, and $60 000 in period 1 and 2. You can borrow and lend at 1% interest rate per period. a. What is the present value of your wealth at the beginning of your life? b. What is the largest constant consumption stream you can afford? c. What borrowing/lending strategy you will use to accomplish b.
	
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Tutorial assignment 4 
Due week 5 at the beginning of your tutorial

1. Suppose that two goods are perfect complements. If the price of good 1 changes what part of the change 
in demand is due to the substitution effect and what is due to income effect?

2. In 2007 many households fixed their mortgage rates for the duration of the mortgage. Early in 2008 the 
nominal interest rate elsewhere increased so that those who stayed with the floating mortgage rate face 
now higher interest rates on their mortgage. Suppose the inflation rate stayed fixed. Show on an 
intertemporal consumption space graph how this increased the well being of those who has fixed their 
mortgage rates. 
 
3. A murder has been committed. The only clue is a grocery receipt left at the scene by the murderer. The 
receipt shows that 20 bags of chips selling for $2 a bag and 10 six-packs of pop selling for $6 per six-
pack were bought on that day. There are two suspects: Colonel Mustard and Miss Scarlet. On searching 
their apartments, you find suspects’s grocery bills for the previous week. Las week chips were $3 a bag 
and pop was $5 a six-pack. Colonel Mustard bought 20 bags of chips and 13 packs of pop at those 
prices. Miss Scarlet bought 30 bags of chips and 7 packs of pop at those prices. Supposing that these 
people have convex and smooth indifference curves, can any of these people be the murderer? Hint: 
think in terms of Giffen/ordinary and income inferior/normal goods. 
 
4. You are born with no tangible assets. You live for three periods out of which you work for two periods 
and retire for one period before you die. You plan to live nothing for your heirs, and you expect your 
working income to be $20 000, and $60 000 in period 1 and 2. You can borrow and lend at 1% interest 
rate per period.  
 
a. What is the present value of your wealth at the beginning of your life? 
b. What is the largest constant consumption stream you can afford? 
c. What...

David · Accepted Answer

Answer 1. If the goods are perfect complements, then the change in price of good 1 will cause a change 
in demand only due to income effect, substitution effect is zero. This is because the complement goods 
are consumed in fixed proportions, so if price changes it will not encourage the person to substitute 
cheaper good for the other one, so substitution effect is zero, income effect is equal to the price effect 
on demand. 
Answer 2.
The intertemporal consumption graph shows the consumption line X’X’ with the interest rates of 2007. 
For the people with fixed mortgage rates the consumption line remains the same even in 2008 since the 
interest rate change does not affect them. For people with floating exchange rate the interest rates 
increase in 2008, so given the incomes,

Tutorial assignment 4 Due week 5 at the beginning of your tutorial 1. Suppose that two goods are perfect complements. If the price of good 1 changes what part of the change in demand is due to the...

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