Topic 4 Solutions

Topic 4 Solutions - of good A and less of good B or vice...

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TOPIC 4 PRACTICE PROBLEMS 1 Problem 1. Indifference Maps Draw your own indifference maps for the following pairs of commodities, using the diagrams at right. Left and right shoes TOP LEFT Chevron and Mobil gasoline TOP RIGHT $5 bills and $10 bills BOTTOM LEFT Smog and lemonade BOTTOM RIGHT First item on x-axis, second on y-axis Problem 2. Marginal Thinking Suppose Rodney Random uses all his income buying quantities of goods A and B, and at his chosen quantities, MU a /P a > MU b /P b . To increase his utility, should Rodney buy more
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Unformatted text preview: of good A and less of good B, or vice versa? Why? Problem 3. Budget Constraints Conny Mist's indifference map for food and booze, and her initial budget line, are shown at right. A. Find the utility-maximizing bundle Z*. B. Suppose Conny gets food stamps that entitle her to 10 units of free food, but which cannot be used for booze. Draw the new budget line and show that her utility rises compared to part A. 1 Some answers provided in boldface . 10 20 30 Q food Q booze...
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