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# h2_ans - The Colorado College Department of Economics and...

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1 The Colorado College Department of Economics and Business Block 7 Econ 207 HW 2 ans. 1. a. \$8.00 = 20 apples can be bought. \$.40/apple b. \$8.00 = 80 bananas can be bought. \$.10/banana c. 10 apples cost: 10 apples × \$.40/apple = \$4.00, so there is \$8.00 – \$4.00 = \$4.00 left to spend on bananas which means \$4.00 = 40 bananas can be bought. \$.10/banana d. One less apple frees \$.40 to be spent on bananas, so \$.40 = 4 more bananas can be bought. \$.10/banana So new purchase of bananas is 40+4 = 44. The rate of trade is given by Price of apples / Price of bananas = \$.40/\$.10 = 4 e. \$8.00 = \$.40 × number of apples + \$.10 × number of bananas = .40 A + .10 B . 2. (a) (b) C D U=5 U=10 U=20

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2 (c) D=10, 10 0 0 U = = (d) When Paul buys 5 DVDs he spends 5(\$20) = \$100. So the income he has left over to spend on CDs is \$200 - \$100 = \$100. So he can buy 100/5 = 20 CDs. His utility will be 10 100 5 . 20 = = 3. (a) MRS = - MU of Tea/MU of Coffee MU of Tea = 4 / = T U MU of Coffee = 3 / = C U MRS = -4/3 = -1.33 Since MRS is constant, implying the indifference curve is linear. This is because the two goods are perfect substitutes. (b) Ms. Caffeine maximizes utility where MRS = Price of Tea/Price of Coffee. Here
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h2_ans - The Colorado College Department of Economics and...

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