Problem 1. Ted is an eight-year-old boy who loves Pokémon cards and Lego minifigures. His father found a website where Ted can trade cards for minifigures (and vice versa) at a rate of one card for two minifigures. His preferences are represented by u(x₁,x₂) = x₁¹x₂³ª, where x₁ stands for cards and x₂ stands for minifigures. Assume both goods are perfectly divisible. Draw the budget constraint assuming Ted has an endowment of 5 cards and 6 minifigures, i.e. (@1,02) = (5,6). b. Given the budget constraint in part a, find Ted's optimal bundle. C. Is Ted a net buyer of net seller of cards? What about minifigures? d. Assume Ted trades to get to the optimal bundle in part b. Imagine Ted visits the website two months later and learns each minifigure can now be traded for two cards. Draw the new budget constraint. Notice that the bundle in part b is Ted's new endowment. a. e. Given the new budget constraint in part d, find the new optimal bundle. f. Relative to the optimal bundle in part b, is Ted now a net buyer or net seller of cards? What about minifigures?
Problem 1. Ted is an eight-year-old boy who loves Pokémon cards and Lego minifigures. His father found a website where Ted can trade cards for minifigures (and vice versa) at a rate of one card for two minifigures. His preferences are represented by u(x₁,x₂) = x₁¹x₂³ª, where x₁ stands for cards and x₂ stands for minifigures. Assume both goods are perfectly divisible. Draw the budget constraint assuming Ted has an endowment of 5 cards and 6 minifigures, i.e. (@1,02) = (5,6). b. Given the budget constraint in part a, find Ted's optimal bundle. C. Is Ted a net buyer of net seller of cards? What about minifigures? d. Assume Ted trades to get to the optimal bundle in part b. Imagine Ted visits the website two months later and learns each minifigure can now be traded for two cards. Draw the new budget constraint. Notice that the bundle in part b is Ted's new endowment. a. e. Given the new budget constraint in part d, find the new optimal bundle. f. Relative to the optimal bundle in part b, is Ted now a net buyer or net seller of cards? What about minifigures?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Problem 1. Ted is an eight-year-old boy who loves Pokémon cards and Lego minifigures. His father
found a website where Ted can trade cards for minifigures (and vice versa) at a rate of one card for two
minifigures. His preferences are represented by u(x₁,x2) = x₁″ x2³″, where x₁ stands for cards and x2 stands
for minifigures. Assume both goods are perfectly divisible.
a. Draw the budget constraint assuming Ted has an endowment of 5 cards and 6 minifigures, i.e.
(@1,02) = (5,6).
b. Given the budget constraint in part a, find Ted's optimal bundle.
C. Is Ted a net buyer of net seller of cards? What about minifigures?
d. Assume Ted trades to get to the optimal bundle in part b. Imagine Ted visits the website two
months later and learns each minifigure can now be traded for two cards. Draw the new budget
constraint. Notice that the bundle in part b is Ted's new endowment.
e. Given the new budget constraint in part d, find the new optimal bundle.
f. Relative to the optimal bundle in part b, is Ted now a net buyer or net seller of cards? What about
minifigures?
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