a) “I care very little about food, but nice clothes are important.”
b) “Coke or Pepsi makes no difference to me.”
c) “I can’t imagine eating pizza without beer.”
d) “It is important for local governments to have both good fire/police protection and a good school system.”
2. Suppose the consumer's budget constraint is given by 10F + 5S = 100 where F is food and S is shelter. How much food can he buy if he purchases 2 units of shelter?
3. Mr. and Mrs. Whiteway both love Broadway musicals. To see a Broadway musical together it costs them $500, including what they pay for tickets, travel, meals, and a hotel room. Mr. and Mrs. Whiteway make $50,000 per year.
a. Draw a budget constraint for the Whiteways showing the choices available to them in allocating their annual income between seeing Broadway productions and all other goods. (Please put Broadway shows on the horizontal-axis, and all other goods on the vertical-axis. In addition, you can simply assume the unit price of all other goods is $1. This is simply for comparison purposes, and this approach is widely used in most economics analysis.)
b. On the same graph, draw a set of indifference curves that would result in the Whiteways choosing to see ten Broadway musicals a year. Explain in words why you drew the indifference curves the way you did (be sure to explain both the shape and location of the indifference curves).
(Hint: First, at a low number of shows, less than 10, is the indifference curve rather steep or flat? Second, what is the optimum number of shows they choose to see each year? The optimum point should be the tangent point between the indifference curve and the budget line.)
4. The price of a bottle of beer is $1 and the price of a pizza is $10. The MRS of bottles of beer for pizza expressed by Karl is 5. Has Karl chosen the optimal amount of beer? How do you know? If Karl is not maximizing, what should he do to improve his situation? (Hint: what is the MRS at the consumer optimum point?)
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