Budget constraint

Budget constraint

PROBLEM 1. Review the following key terms and give their definitions:
(1) budget constraint; (2) indifference curve; (3) consumer surplus; (4) marginal willingness to pay;
(5) equivalent variation; (6) compensating variation; (7) publicly provided goods;
PROBLEM 2. Textbook Chapter 4 Exercise 5. (Page 80)
PROBLEM 3. Assume the price of stuff is $2.
(1). How much is the income?
(2). What are the prices of electricity on each of the two budget constraints?
(3). Derive the demand function for electricity.
(4). Calculate the consumer surplus when the price is $118.
(5). Assume that the consumer originally faced a high price for electricity, and then the price is
lowered. Draw EV and CV on the figure 1 and 2 respectively (don’t forget to label)


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