Econ 401
Prof. Dittmer
Questions for chapter 3.
1. (stolen from an actuarial exam):
Joe’s budget line is defined by the equation y = -.05x + 18, where y is the quantity of
meat and x is the quantity of bread. If Joe’s income increases, what will happen to the
slope and the y-intercept of his budget line?
(A) Both the slope and the y-intercept will increase.
(B) The slope will increase while the y-intercept will remain unchanged.
(C) The slope will decrease while the y-intercept will remain unchanged.
(D) The slope will remain unchanged while the y-intercept will decrease.
(E) The slope will remain unchanged while the y-intercept will increase.
Select the correct answer, and explain both why it is correct, and why the other options
are incorrect.
2. Another actuarial question:
Five self-interested colleagues are dining together at a restaurant where desserts cost 5.0
each. If dining alone, one of the colleagues would be willing to pay 3.5 for a dessert.
Two of the colleagues would be willing to pay 4.5 for a dessert while the other two would
be willing to pay 5.5. The restaurant will not give individual checks, so the colleagues
have agreed to split the bill evenly.
If the five colleagues each act out of their own self-interest, how many desserts will be
ordered?
(A) 0
(B) 2
(C) 3
(D) 4
(E) 5
Select the correct answer, and explain why it is correct.
Do the following end of chapter problems: 3, 7, 8, 10, 16, 18 and optional math problems
23, 24, 27
