Question 3 Mrs. Griffiths earns $5000 a week and spends her entire income on dresses and handbags, since these are the only two items that provide her utility. Furthermore, Mrs. Griffiths insists that for every dress she buys, she must also buy a handbag. i. What is the algebraic equation for Mrs. Griffiths budget constraint if dresses cost $25 each and handbags cost $14 each? How many of each good will she buy and represent this on a budget line with handbags on the horizontal axis. ii. Draw an indifference curve showing the optimum choice. Label the optimum as point A. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. iii. Suppose the price of a dresses increases to $200 and income decreases to $4200. What is the new algebraic equation for Mrs. Griffiths budget constraint? Show the impact of the new budget line relative to the original budget line. iv. What would be the new marginal rate of substitution that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. v. Assume for this question only that when the price of dresses decreases, less of that good is demanded. Illustrate the income and substitution effect of this price decrease.
Question 3 Mrs. Griffiths earns $5000 a week and spends her entire income on dresses and handbags, since these are the only two items that provide her utility. Furthermore, Mrs. Griffiths insists that for every dress she buys, she must also buy a handbag. i. What is the algebraic equation for Mrs. Griffiths budget constraint if dresses cost $25 each and handbags cost $14 each? How many of each good will she buy and represent this on a budget line with handbags on the horizontal axis. ii. Draw an indifference curve showing the optimum choice. Label the optimum as point A. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. iii. Suppose the price of a dresses increases to $200 and income decreases to $4200. What is the new algebraic equation for Mrs. Griffiths budget constraint? Show the impact of the new budget line relative to the original budget line. iv. What would be the new marginal rate of substitution that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. v. Assume for this question only that when the price of dresses decreases, less of that good is demanded. Illustrate the income and substitution effect of this price decrease.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Please answer the last two questions iv & v
Transcribed Image Text:Question 3
Mrs. Griffiths earns $5000 a week and spends her entire
income on dresses and handbags, since these are the
only two items that provide her utility. Furthermore,
Mrs. Griffiths insists that for every dress she buys, she
must also buy a handbag.
i. What is the algebraic equation for Mrs. Griffiths
budget constraint if dresses cost $25 each and
handbags cost $14 each? How many of each good
will she buy and represent this on a budget line
with handbags on the horizontal axis.
ii. Draw an indifference curve showing the optimum
choice. Label the optimum as point A. What would
be the marginal rate of substitution at the point that
corresponds to the optimal consumption choice?
Interpret the marginal rate of substitution.
iii. Suppose the price of a dresses increases to $200
and income decreases to $4200. What is the new
algebraic equation for Mrs. Griffiths budget
constraint? Show the impact of the new budget line
relative to the original budget line.
iv. What would be the new marginal rate of
substitution that corresponds to the optimal
consumption choice? Interpret the marginal rate of
substitution.
V. Assume for this question only that when the price
of dresses decreases, less of that good is demanded.
Illustrate the income and substitution effect of this
price decrease.
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