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# PS3 - If the prices of sushi and hamburgers are both \$3 and...

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Rice University ECON 211, Fall 2007 Problem Set 3 Due on Thursday/Friday, September 20/21 1. ( 15 pts. ) Consider a person whose preferences are represented by the utility function u ( x, y ) = xy . a) For each pair of bundles A and B , indicate whether A is preferred to B ( A B ), B is preferred to A ( B A ) or A is indifferent to B ( A B ): A B (0,1) (1,0) (3,5) (4,2) (3,10) (4,8) (8,3) (16,6) b) For this person and for the eight bundles in a), list the bundles in order of preference from most to least preferred. If two bundles are indifferent, put them side by side in your list. 2. ( 20 pts. ) Consider the following graph, which shows two budget lines and given those budget lines, a consumer’s optimum consumption level. Decrease the price of good x more, and, roughly, mark this consumer’s optimum bundles on the same figure. Then, using the blank picture, draw his demand curve for good x . 3. ( 20 pts. ) Mike consumes only sushi and hamburgers and his utility function is u ( s, h ) = s + h ; i.e., he considers sushi and hamburgers perfect substitutes. Draw his indifference curves.

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Unformatted text preview: If the prices of sushi and hamburgers are both \$3 and Mike’s income is \$30, show his budget 1 constraint and consumption choice(s). If the price of sushi goes up to \$5, show Mike’s new point of consumption. 4. ( 20 pts. ) Two people have identical convex indiﬀerence curves. If they live in diﬀerent parts of the country and face diﬀerent price ratios for steak and chicken, is it reasonable to assume that they consume the same combination of steak and chicken? Why or why not? explain, using graphs. (Hint: Analyze two cases; one for interior solution (ﬁgure 3.13, 68 page) and one for corner solution (ﬁgure 3.14, page 72).) 5. ( 25 pts. ) Paul sees that bags of potato chips are labeled “buy 3, get 1 free”. If the price of other goods is \$1, he has an income of \$30, and the price of a bag of chips is \$2, draw his budget line. 2...
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PS3 - If the prices of sushi and hamburgers are both \$3 and...

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