1. The gragh below shows indifference curves (IC₁ and IC₂) and budget constraints (BC1, BC2, BC3) for Sam who enjoys consuming tacos with soda. (6 points) a. Based on the Budget Constraint BC2, if Sam's budget is $28 then what would be the the prices of soda and/or taco? b. What combination of tacos and soda quantities optimizes Sam's utility? Tacos 5 4 3 2 1 O 1 (2,3) 2 3 (4,3) 4 BC3 5 6 7 IC1 IC2 BC2 8 9 BC1 10 Cans of Soda || 1. The gragh below shows indifference curves (IC₁ and IC₂) and budgetconstraints (BC₁, BC2, BC3) for Sam who enjoys consuming tacos with soda.(6 points)a. Based on the Budget Constraint BC2, if Sam's budget is $28 then whatwould be the the prices of soda and/or taco?b. What combination of tacos and soda quantities optimizes Sam's utility?Tacos5★321O(2,3)IN3(4,3)BC35 6IC1BC27 8IC2la9BC110Cans of Soda||

The budget line illustrates the various combinations of goods that a consumer can purchase within…

1. The gragh below shows indifference curves (IC, and IC₂) and budget constraints (BC₁, BC2, BC3) for Sam who enjoys consuming tacos with soda. (6 points) a. Based on the Budget Constraint BC2, if Sam's budget is $28 then what would be the the prices of soda and/or taco? b. What combination of tacos and soda quantities optimizes Sam's utility? Tacos 5 ليا 2 1 O (2,3) N 3 (4,3) BC3 5 9 7 IC1 BC2 IC2 9 BC1 10 Cans of Soda

1. The gragh below shows indifference curves (IC, and IC₂) and budget constraints (BC₁, BC2, BC3) for Sam who enjoys consuming tacos with soda. (6 points) a. Based on the Budget Constraint BC2, if Sam's budget is $28 then what would be the the prices of soda and/or taco? b. What combination of tacos and soda quantities optimizes Sam's utility? Tacos 5 ليا 2 1 O (2,3) N 3 (4,3) BC3 5 9 7 IC1 BC2 IC2 9 BC1 10 Cans of Soda

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter6: Consumer Choice And Demand

Section: Chapter Questions

Problem 1.3P

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2. Suppose a consumer has a fixed budget of $200, and she spends it all on two goods, x1 and x2. The price of x, is $40 per unit and the price of x2 is $20 per unit; x, and x2 are normal goods. (a) Draw and label the consumer's budget constraint, with x1 on the horizontal axis and x2 on the vertical axis. (b) What is the value of the consumer's marginal rate of substitution at her optimal con- sumption bundle? Explain what you your answer means. (c) Suppose the price of x, increases to $25 per unit. Graphically show the effect of this price change on the consumer's budget constraint. (d) Explain the impact of the substitution effect and the income effect of the price change in part (c) on the individual's consumption of x, and x2. (Hint: For full credit, explain both the separate and combined impacts of substitution and income effects on x1. Do the same for x2).
5) Below is John's indifference map for juice and snacks. Also shown are three budget lines resulting from different snack prices and assuming he has $20 to spend on these goods. (Hint: Be aware that we put price of product (snacks) on the Y-axis to draw demand curve.) Juice 20 15. 134 10- 5710 20 40 Snacks Which of the following points are on John's demand curve for snacks? a) p = 2, q=10 b) p=2, q=13 c) p = 2,q=5 d) p = 1, q=20
2. Suppose a consumer has a fixed budget of $200, and she spends it all on two goods, x, and x2. The price of x, is $40 per unit and the price of x2 is $20 per unit; x1 and x2 are normal goods. (a) Draw and label the consumer's budget constraint, with x1 on the horizontal axis and x2 on the vertical axis. (b) What is the value of the consumer's marginal rate of substitution at her optimal con- sumption bundle? Explain what you your answer means. (e) Suppose the price of x, increases to $25 per unit. Graphically show the effect of this price change on the consumer's budget constraint.
4. Tim wants to maximise his utility given his utility function of U(A, B) = A²B4. He faces the following prices and income: PA = 25; PB = 20; M = 250. However, a change in the price of good A to PA = 22 will change his optimal bundle. If he is only interested in being able to consume his original bundle of goods, how much income would he need after the price change? (a) Tim would require £54 less income (b) Tim would require £18.33 more income (c) Tim would require £10 less income (d) Tim would require £16.66 more income (e) Tim would require £16.66 less income
3) i. The marginal utility for shoes and coffee is given below for five individuals. A pair of shoes costs $2, and a cup of coffee costs $1. a. Which of these consumers are optimising over their choices? Explain b. For those who are not, how should they adjust their spending? Explain ii. “Pasta is Miguel’s favourite meal therefore the law of diminishing marginal utility does not apply”. Do you agree with this statement? iii. It is known that the indifference curve is convex. What does this tell you about the relationship between the goods? iv. The income effect and the substitution effect work in the same direction for a normal good. Explain how this differs for an inferior good.
2a) Sompa's utility function for strawberries and grapes is given by U (S, G) =10s?G'. Where S represents strawberries and G represents grapes. i. Write down Sompa's budget constraint. ii. What combination of strawberries and grapes maximises Sompa's utility if her income is GHC200, the price of strawberries is GHC 5per unit and the price of grapes is GHC 10 per unit? ii. What is Sompa's total utility (satisfaction)? iv. If the price of strawberries increases to GHC15 per unit and the price of grapes and Sompa's income remain the same, discuss briefly what Sompa will have to do to maximize her satisfaction. b) Supposing strawberries was a giffen good, derive the demand curve for strawberries with this increase in price. c) Explain the notion that "on the basis of price changes goods can be classified into normal and giffen, and on the basis of income changes, goods can be classified into normal and inferior".
3. Tony is throwing a party at his Fraternity and is trying to choose what booze to buy. A bottle of vodka has three times the alcohol as a six-pack of beer. Assume that Tony only cares about the total amount of alcohol in his basket. (use vodka on the X-axis and beer measured in six-pack on the Y-axis) a) Devise a utility function to represent these preferences. b) Suppose a bottle of vodka costs $40, a six-pack of beer costs $10, and the budget is $200. Write the budget constraint. c) Solve Tony's utility maximization problem and find the optimal combination. d) Suppose that a bottle of vodka cost has increased to $50. What will be his new optimal combination?
7. Bob receives utility from days spent traveling on vacation domestically (D) and daysspent traveling in a foreign country (F) as given by the utilityU(D; F) = DFThe price of a day spent traveling domestically is 160 pounds and in a foreigncountry 200 pounds. Bobís annual budget for traveling is 8000 pounds. (a) Find Bobís utility maximising choice of days traveling domestically and of daystravelling in a foreign country. Find also his utility level from consuming thatbundle. Suppose that the price of domestic traveling increases to 250 pounds per day.Denoting his budget for traveling x, (suppose by now that it is unknown) findthe demand for D and F under the new prices as a function of x.
4. Liam initially has a weekly allowance of €24 to spend on eggs (at €0.40 per egg) and beans (at €0.80 per tin). Liam will only consume 4 eggs with each tin of beans and never changes this proportion. (a) What is the utility maximising amount of eggs and beans that Liam buys each week? (b) Suppose the price of eggs rise to €0.60 per egg but the price of beans falls to €0.60 per tin. At the same time, Liam's weekly allowance rises to €30. How much of each good will Liam now buy? Compare your answer to that in (a) and explain the difference, if there is one. Use a diagram to complement your answer.
3. Utility maximization under constraint, substitution and income effect, CV and EV (20 points) Josh gets utility (satisfaction) from two goods, A and B, according to the utility function U(A, B) = 5A/4B³/4. While Josh would like to consume as much as possible he is limited by his income. a. Maximize Josh's utility subject to the budget constraint using the Lagrangean method. b. Suppose Pa increase. Show graphically the income, substitution effect and total effect and explain. c. Suppose Pa increase. Show the graph for CV and EV and explain.
3. Indifference curves and preferences Gilberto likes both chocolate and milk. Assume that the "more is better" principle applies to Gilberto; that is, he would always prefer to consume more of either good, holding the consumption of the other good constant. The points on Figure 1 represent combinations of milk and chocolate that Gilberto might choose to consume. Figure 2 shows the same points as Figure 1, but it also shows some of Gilberto's indifference curves: I, I, and I3. These curves show more information about Gilberto's preferences than Figure 1. Figure 2 Figure 1 O. O E MILK Giasses MILK Glasses CHOCOLATE (Bars) CHOCOLATE (Bars)
1. Based on the table below describe Marginal Utility and Diminishing Marginal Utility? What happens as you consume more and more apples? At what point is utility maximised? Units of Apples Consumed Total Utility (TU) Marginal Utility (MU) 1 10 10 2 18 8 3 24 6 4 28 4 5 30 2 6 30 0 7 28 -2