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ECON331HW3KEYFALL2007

# ECON331HW3KEYFALL2007 - Economics 331 Fall 2007 Homework#3...

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Economics 331 Fall 2007 Homework #3: Key 1. For each of the following cases, draw a set of indifference curves. Indicate in which direction utility increases. Provide a brief explanation with your diagrams. a. A typical person’s indifference curve between food and garbage. Put food on the y-axis. Utility increase to the north-west since you get more food and less garbage. The indifference curves slope up since you need to be compensated for taking more garbage with more food. The slope of the indifference curve increases: for each additional food you acquire, you would be willing to take a smaller and smaller amount of garbage to remain indifferent. b. Oscar the Grouch’s indifference curve for food and garbage. Oscar loves garbage but has no use for food. Put food on the y-axis. Garbage Food Garbage Food

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Oscar’s utility increases as you move east. For a given amount of food, Oscar gets more utility as he gets more garbage. The indifference curves are vertical lines since food is a neutral good; holding the amount of garbage fixed, more or less food neither increases/decreases utility. c. Eve likes apples but has no use for pears. Put pears on the y-axis. Same logic as part (b). d. Adam eats beef ribs and pork ribs, but likes beef ribs twice as much as pork ribs. Put pork on the y-axis. Utility increases in the northeast direction since more of both beef and pork increase utility. The goods are perfect substitutes with a MRS of 2: Adam is willing to give up 2 pork ribs for 1 beef rib. e. Holly likes to give large parties, and has a strong preference for having the same number of men and women at the party. Draw two sets of indifference curves under the following conditions: i. extra men or women are useless but they don’t detract from the party. This is just an example of goods that are perfect complements: the ratio of M to W is 1:1. ii. Holly’s utility function is given by: U(W,M) = min {2W-M, 2M-W} Utility increases in the northeast direction. Beef Pork Women Men M=W
The “legs” of the indifference curves both pivot in to the M=W line. Note that one leg has a slope of 2 and the other a slope of 1/2 . This reflects the MRS when there are more men than women at the party and vice versa.

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2. You have \$200, which you spend on tea and coffee. The price of coffee is \$10/lb and the price of tea is \$4/lb. Consider the following two government programs: a. On a large diagram depict the following. Make sure you draw your diagram to scale or you may have problems.
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ECON331HW3KEYFALL2007 - Economics 331 Fall 2007 Homework#3...

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