1. Homework #2 Government Finance

2. Soft Drinks ($2) Pizza ($10) $100 Budget 50 10 To determine the combination of soft drinks and pizza, find an indifference curve and select the point on the budget constraint that is tangent. Indifference Curve 1a. Budget Constraint 0

3. Soft Drinks ($2) Pizza ($5) $100 Budget 50 10 1b. 20 With the decreased pizza purchase price, more pizzas can be bought under the same $100 budget. The number of pizzas that can be bought go up from 10 to 20. This causes a rotation of the budget constraint. 0 Budget Constraint

4. Soft Drinks ($2) Pizza ($10) $200 Budget 100 20 1c. By increasing your budget to $200 dollars, the budget constraint shifts out by $100. With a $100 increase, soft drinks can go up from 50 to 100, and pizza can go up from 10 to 20. 10 50 0 Budget Constraint

5. Income ($25/hr) Number of leisure hours $50,000 2,000 2. Indifference Curve To determine the combination of income and leisure hours, find an indifference curve and select the point on the budget constraint that is tangent. 0 Budget Constraint

6. Year 2 Year 1 $102,500 $97,500 3. Indifference Curve To determine the combination between year 1 and year 2, find an indifference curve that is tangent to the budget constraint and select this tangent point. 0 Budget Constraint $50,000 Interest 5% Saving Rate Interest 5% Borrowing Rate