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# HW4 Answers - Econ 1 Tang Fall Quarter 2007 Homework 4...

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Econ 1: Tang Fall Quarter 2007 Homework 4: Chapter 8 Due Wednesday November 14, at the beginning of class. Please write your name, PID, and section number/TA name on your homework. 1. Suppose that Marvin is currently consuming 4 apples and 4 bananas. If the price of apples is .25 and Marvin spends \$6 on apples and bananas, then what is the price of bananas? We know that Pa*A+Pb*B=I and that A=4, B=4, Pa=.25, and I=6. We want to solve for Pb. By rearranging the budget equation, we can express Pb in terms of variables of which we know the values. Pb*B=I-(Pa*A) or Pb=(I-(Pa*A))/B So Pb=(6-(.25*4))/4= (6-1)/4=5/4 or \$1.25 2. Every morning Kristen buys a bagel and a cup of coffee from Peabody’s. At Peabody’s the price of bagels is \$2.00 and the price of a cup of coffee is \$1.00. a. Assuming that Kristen has \$20 to spend on coffee and bagels, sketch her budget constraint, putting coffee on the x-axis and bagels on the y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. b. Now, suppose that Peabody’s wants to encourage customer loyalty. To do so they start the following program: every time someone purchases 10 cups of coffee, they get the 11 th cup for free. Sketch Kristen’s new budget constraint under the assumption that she still has \$20 to spend on coffee. As above, put coffee on the x-axis and bagels on the y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. In addition, if there are any changes in the slope of the budget constraint, clearly identify the coordinates (i.e. the points) where those changes occur. a. coffee bagels 20 10 |slope|=1/2

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Econ 1: Tang Fall Quarter 2007 b. coffee bagels 22 10 |slope|=1/2 10 11 21 3. Suppose that George likes to eat yogurt every morning for breakfast but he doesn’t care if he eats Dannon yogurt or Alta Dena yogurt. For him they are
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HW4 Answers - Econ 1 Tang Fall Quarter 2007 Homework 4...

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