Principles of Microeconomics-Sec.1

1.

Use the evidence given in Hansen and Prescott (2002, pp. 1205-1209 - attached) to show how relative prices of the two most important factors of production for the European economy changed after the Black Death and what caused this shift? [5 marks]

Modify and apply the technological choice model given in sections 2.3-2.6 of Core economics to the case of the Black Death and use it to hypothesize what would be the expected impact on the choice of technology? Please make sure that the axes labels used in the diagram are relevant to the European economy at the time of the Black Death [15 marks]

Research economic history material on the web and give at least one example of a change in technology witnessed after the Black Death that would match the prediction of the model? Please reference the material you use to answer this question. [15 marks]

Use the material covered in the Unit 2 lectures to explain why a shift in relative prices after the Black Death did not result in a permanent technological revolution of the type witnessed after 1800. [15 marks]

2.

Julia’s consumption bundle consists of only two goods- Bread (B) and Meat (M). Her average monthly income is $25 whilst per unit market prices of Bread (B) and Meat (M) are $4 and $3, respectively. It is also given that Julia’s optimal consumption bundle is made up of 4 loaves of Bread and 3 kgs of Meat.

Draw a correctly labelled diagram using an indifferent map and budget constraint to show this information. (keep Bread on the horizontal axis) [10 marks]

Now imagine a scenario where per unit price of Bread falls to $2 and only sufficient money is taken from this Julia to make her satisfied as she was prior to this change in price. Would Julia buy few or more loaves of Bread? Illustrate the impact on the diagram drawn for part (a) and also give a reasoning for your answer. (clearly label the position) [10 marks]

Imagine that reality is different from what is depicted in part (b). No money was actually taken away from Julia; her income remained the same at $24 when price of Bread had fell. We see that when the price of Bread fell, Julia’s consumption of Meat had not changed at the final equilibrium. What can you conclude about the nature of the good, Meat for Julia in this case? Illustrate the impact on the diagram drawn for part (a) and also give a reasoning for your answer. (clearly label the position) [10 marks]

Suppose that few years later, Julia’s preferences change such that she now finds Bread and Meat to be perfectly substitutable.

“The optimal consumption bundle of Julia will always be a corner solution.”

Continue keeping Bread on the horizontal axis, show with the help of labelled diagram(s) whether this statement is True/False. (no numbers or calculations are required for this part) [10 marks]

If Julia always gets same additional happiness from three loaves of Bread as she does from two kgs of Meat. How will her indifference curves for such preferences look like? Also label the direction of increasing Utility. (no numbers or calculations are required for this part) [10 marks]