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Unformatted text preview: Rice University ECON 211, Fall 2007 Problem Set 4 Due on Thursday/Friday, September 27/28 1. ( 35 pts. ) Maria has a budget of $120 a week that she spends on chocolate and music CDs. Let the price of chocolate be P C = $2 and the price of a music CD be P C D = $6. a) Draw her budget line on a (preferably large) graph with CDs on the X-axis. b) Assuming that she buys 30 chocolates at her optimum, draw her indifference curve at her optimum bundle on the same graph. Label the optimum as A . c) What is the marginal rate of substitution at point A ? Now suppose the price of a CD become cheaper at $4. Yet, on her optimum, she continues to consume the same amount of chocolate, that is, 30 chocolates. d) Draw her new budget line on the same graph. e) Show a typical indifference curve consistent with her new optimum consumption bundle. Label it as B . f) Show the substitution and income effects for the consumption of music CDs due to the price change in music CDs as mentioned above. g) Over this range of prices for music CDs, is the demand for CDs elastic, inelastic, or unitary elastic? Explain. 2. ( 20 pts. ) You are a die-hard ice cream lover and you work to earn money so that you can buy ice-cream, which is the only good you consume. As a hard-working Rice student, youcan buy ice-cream, which is the only good you consume....
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This note was uploaded on 05/03/2008 for the course ECON 211 taught by Professor Na during the Spring '08 term at Rice.
- Spring '08