Problem 3 (Perfect Complements) Trevor always begins his day with a strawberry milkshake. He makes it by mixing milk (x1) with five strawberries (r2). The secret of a really good milkslhake lies in the optimal proportion of milk and fruit: one glass always comes with five strawberries! a) Plot in a diagram Trevors' preferences (indifference map). Depict three indifference curves that pass through the following bundles (5, 1), (10, 10) and (15,4). What is the MRS at each of these points? b) What utility function represents these preferences (make sure you use right coefficients defining proportion). On the graph from a), indicate the level of utility corresponding to cach indifference curve. c) Multiply your utility function by ten and add to it constant equal to two. How did the indifference map change (explain why)? How was the level of utility associated with the each indifference curve affected?

Problem 3 (Perfect Complements) Trevor always begins his day with a strawberry milkshake. He makes it by mixing milk (x1) with five strawberries (r2). The secret of a really good milkslhake lies in the optimal proportion of milk and fruit: one glass always comes with five strawberries! a) Plot in a diagram Trevors' preferences (indifference map). Depict three indifference curves that pass through the following bundles (5, 1), (10, 10) and (15,4). What is the MRS at each of these points? b) What utility function represents these preferences (make sure you use right coefficients defining proportion). On the graph from a), indicate the level of utility corresponding to cach indifference curve. c) Multiply your utility function by ten and add to it constant equal to two. How did the indifference map change (explain why)? How was the level of utility associated with the each indifference curve affected?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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9. Income and substitution effects Sean and Yvette Durand live in Edmonton and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves I1 and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labelled point represents the tangency between a budget constraint and the corresponding indifference curve. DINER BREAKFASTS 48 40 26 BC 0 2 5 10 Z H BC FANCY DINNERS (?) The initial budget constraint (BC₁) shows the Durands' budget constraint when the price of a fancy dinner is $160. At this price, Sean and Yvette would choose to consume two fancy dinners. Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC2, which represents a new relative price of four diner breakfasts per fancy dinner. (Hint: The blue line labelled H is parallel to BC2 and…
What information is contained in an indifference curve? Why are such curves (a) downsloping and (b) convex to the origin? Why does total utility increase as the consumer moves to indifference curves farther from the origin? Why can’t indifference curves intersect?
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Outline the four properties that apply to all indifference curves.