ps4x101_s03 - Suppose we give Carley the opportunity to...

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Econ 101 - Spring 2003 - Wissink PS4-XtraQ Due Thursday 3/6 at the start of class. Place in TAs box in the back Late problem sets will not be accepted. 1. Carley Cornell, a consumer in Ithaca with a very nicely behaved indifference curve map, has an income of $480 and consumes only two goods, food and clothing. The price of food is $10 per unit and the price of clothing is $12 per unit. Carley is a utility optimizer and chooses a bundle that maximizes her happiness subject to her budget constraint. In this personal "best bundle" she buys 30 units of food. (a) Draw a carefully labeled and detailed indifference-curve/budget-line diagram illustrating Carley's equilibrium. Put food on the horizontal and clothing on the vertical. How many units of clothing are in the optimal bundle? What must be the value of her marginal rate of substitution (MRS) between food and clothing at her optimal bundle?
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Unformatted text preview: Suppose we give Carley the opportunity to join a village food co-op. The membership fee is $120. Members can then buy food for $9 per unit and clothing for $6 per unit. (b) Illustrate on your graph for part (a) how joining the co-op affects Carley's budget- line/indifference-curve diagram. Should she join the co-op? Explain. If she joins the co-op and re-optimizes, what will be the value of the MRS of food for clothing at the new equilibrium bundle? If she decides to join the co-op, what is the MRS of food for clothing at the original optimal bundle? 2. Jack, Jill, and John have identical demand curves. Jack’s demand curve for wine is given by the equation Q D = 30 - P/3, where price is given in dollars and quantity is measured in bottles. (a) Draw the market demand curve for wine. (b) Calculate total consumers' surplus if wine is sold at $20 a bottle....
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