Demand Theory and Market Analysis: Budget Constraints, Consumer Surplus, and the Impact of Price Changes

A study on demand theory, budget constraints, consumer surplus, and the effect of price changes on markets.

Christopher Lee

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Demand Theory and Market Analysis: Budget Constraints, ConsumerSurplus, and the Impact of Price ChangesWeek 02 Assignment 01Demand Theory Problem Set1.Part I:Draw a budget constraint and an indifference curve for an individual who works inperiod one and is retired (earns no income) in period two. He consumes some of hisincome in period 1 and saves the rest of his income for period 2. Place consumption inperiod 1 on the horizontal axis, and consumption in period 2 on the vertical axis. He has tochoose how much to consume now and how much to save for the future. Suppose he earns$1,000,000 in period 1 and receives 10% interest on any income saved for period 2. Theinterest is taxed at 30%. Draw his budget constraint, labeling the axes, and draw anindifference curve that maximizes his utility. Label consumption in each period, C1 and C2.Label savings in period 1. (Remember that any income that is not consumed is saved forperiod 2).

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