4. Indifference Curve and Budget Line (20%) Annie has an income of $160 an hour. Popcorn costs $5 a bag, and costs $4 a six-pack of energy drink a. Draw a graph of Annie's budget line with six-pack of energy drink on the x- axis, and popcorn on the y-axis. (4%) b. What is the slope of Annie's budget line (2%)? What could this slope be also called? (2%) c. If we know that Annie maximizes her utility with the purchase of 20 bags of popcorn, how many six-pack energy drink she will purchase?-(an estimate from your graph & actual calculation) (5%), draw an indifference curve reflecting this optimum. (5%)

4. Indifference Curve and Budget Line (20%) Annie has an income of $160 an hour. Popcorn costs $5 a bag, and costs $4 a six-pack of energy drink a. Draw a graph of Annie's budget line with six-pack of energy drink on the x- axis, and popcorn on the y-axis. (4%) b. What is the slope of Annie's budget line (2%)? What could this slope be also called? (2%) c. If we know that Annie maximizes her utility with the purchase of 20 bags of popcorn, how many six-pack energy drink she will purchase?-(an estimate from your graph & actual calculation) (5%), draw an indifference curve reflecting this optimum. (5%)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Question 5. Partial info contained in question 4

Kai-Li Tsai, Ph.D.
4. Indifference Curve and Budget Line (20%)
Annie has an income of $160 an hour. Popcorn costs $5 a bag, and costs $4 a six-pack of
energy drink
a. Draw a graph of Annie’s budget line with six-pack of energy drink on the x-
axis, and popcorn on the y-axis. (4%)
b. What is the slope of Annie's budget line (2%)? What could this slope be also
called? (2%)
c. If we know that Annie maximizes her utility with the purchase of 20 bags of
popcorn, how many six-pack energy drink she will purchase?-(an estimate
from your graph & actual calculation) (5%), draw an indifference curve
reflecting this optimum. (5%)
5. Income Effect & Substitution Effect (20%)- (still use budget line with energy drink
on the x-axis, and popcorn on the y-axis).
If Annie's hourly income remains $160. The price of energy drink is on sale and
drops to $2 a six-pack of can energy drink, while the price of popcorn remains
at $5 a bag.
a. Draw the new budget line(s) (with energy drink on the x-axis, and popcorn on
the y-axis) (5%)
b. Use indifference curve to identify the change in quantity purchased (5%)
c. and illustrate the income effects (points and distance) (10%) and substitution
effects (points & distance) (5%)

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