h2 - (c) Suppose Paul spends all his income on DVDs. How...

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1 The Colorado College Department of Economics and Business Block 7 Econ 207 HW 2. 1. Suppose a person has $8 to spend only on apples and bananas. Apples cost $.40 each, and bananas cost $.10 each. (a) If this person buys only apples, how many can be bought? (b) If this person buys only bananas, how many can be bought? (c) If the person were to buy 10 apples, how many bananas could be bought with the funds left over? (d) If the person consumes one less apple (that is nine), how many bananas could be bought? Is this rate of trade-off the same no matter how many apples are relinquished? (e) Write down the algebraic equation for this person’s budget constraint. (5x2 = 10 points) 2. Paul derives utility from CDs and DVDs. His utility function is D C U . = (a) Sketch Paul’s indifference curves for U=5, U=10, and U=20. (b) Suppose Paul has $200 to spend and that CDs, cost $5 and DVDs cost $20. Draw Paul’s budget constraint on the same graph as his indifference curves.
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Unformatted text preview: (c) Suppose Paul spends all his income on DVDs. How many can he buy and what is his utility? (d) If Paul buys 5 DVDs how many CDs can he buy? What is his utility? (4x2.5 = 10 points) 3. Ms. Caffeine enjoys coffee (C) and tea (T) according to the utility function U(C, T) = 3C + 4T. (a) What does her utility function say about her MRS of coffee for tea? What do her indifference curve look like. (b) If coffee and tea cost $3 each and Ms. Caffeine has $12 to spend on these products, how much coffee and tea should she buy to maximize her utility? Explain. What is her utility? (c) Draw the graph for her indifference curve map and her budget constraint, and show the utility-maximizing equilibrium point. (d) What would she do if the price of coffee fell to $2, while that of tea remaining unchanged? Explain and also show the new equilibrium in your graph. (2+3+2+3 = 10 points)...
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