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Price Theory HW2

Price Theory HW2 - Skelton Eco 3301 Homework 2 1 Suppose...

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Skelton Eco 3301 Homework 2 1. Suppose you divide your income between cheese and other goods. Cheese costs $4 a pound and you buy 10 pounds a day. One day the price of cheese rises to $6 a pound and at the same time your income rises by $20 a day. Do these changes make you better off, worse off, or neither? 2. Based on his preferences, Spike Lee is willing to trade 4 movie tickets for one basketball ticket. If movie tickets cost $8 and basketball tickets cost $40, should he make the trade? 3. Suppose Lizzie Borden views butter and margarine as perfectly substitutes for each other. A) Draw a set of indifference curves that illustrate her preferences for butter and margarine. B) Are these indifference curves convex? Why or why not? C) If butter costs $2 per package and margarine $1, and if Lizzie has $20 to spend on butter and margarine, which butter/margarine market basket will she purchase? Show this result graphically (with indifference curves and her budget line).
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