1. Practice Problems Constrained Optimization

2. Two Goods You have budgeted $500 for the Christmas vacation to buy presents and gasoline for travel. In your initial planning, gasoline costs $3.00 a gallon and the presents that you anticipate giving cost $100 each. Draw your budget constraint and explain how you would determine the combination of travel and presents to purchase. Show what happens to the budget constraint and your consumption decision if the price of gasoline declines to $2.00 because of weak worldwide demand for oil. Show what happens to the budget constraint and your consumption decision if you raise your budget to $500. If your travel is a fixed destination which is 500 miles round trip and your car gets 25 miles per gallon, show the resulting decisions in your diagram.

3. Leisure-Work Tradeoff You have 160 hours in your work month and must decide how much vacation time you will take. You make $10 an hour. Draw a budget constraint that shows your leisure and income possibilities for the year. Explain how you would decide how much vacation time will make you the most happy.

4. Savings and Borrowing Tradeoffs You have $5,000 which can be spent this year or next year. You can earn 1% on your money. Draw a budget constraint that shows your consumption opportunities in each of two years. Explain how you would choose how much to spend or borrow in the first year.