PROBLEM SET 3

PROBLEM SET 3 - Economics 3070-001 Spring 2008 (Due...

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Spring 2008 Problem Set 3 (Due February 11 th ) 1. Each day Peter, who is in the third grade, eats lunch at school.  He only likes liver ( L and onions ( N ), and these provide him a utility of ( 29 ( 29 LN N L U ln , = . Liver costs $4.00 per serving, onions cost $2.00 per serving, and Peter’s mother gives  him $8.00 to spend on lunch. a. Give the equation for Peter’s budget line.  What is the slope of the budget line? b. Graph Peter’s budget line.  Place the number of liver servings on the vertical axis  and the number of onion servings on the horizontal axis. c. On the same graph, draw several of Peter’s indifference curves, including one that  is tangent to his budget line. d. Using calculus and algebra, find the basket of liver and onions that maximizes  Peter’s utility.  (Assume Peter can purchase fractional amounts of both goods.)  Mark this basket on your graph. Suppose the school decides to discourage the consumption of liver by raising the price  of liver to $5.00 per serving. e.
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PROBLEM SET 3 - Economics 3070-001 Spring 2008 (Due...

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