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Problem Set 04 (ECO100)

# Problem Set 04 (ECO100) - Prof Gustavo Indart Department of...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Problem Set 4 1. Jane’s marginal rate of substitution of apples for oranges is equal to 5. Both apples and oranges are measured in pounds. a) Draw an indifference diagram (with apples on the horizontal axis) showing an indifference curve with a point that has this marginal rate of substitution of 5. b) Draw a budget line tangent to your indifference curve for the case where the price of apples is \$1 per pound and the price of oranges is \$0.50 per pound. c) Given a marginal rate of substitution of 5 and the prices in part b., does Jane substitute apples for oranges or substitutes oranges for apples to improve satisfaction? d) What is the marginal rate of substitution at the point on the indifference curve which maximizes Jane’s satisfaction at the above prices? e) For consumer satisfaction to occur when the marginal rate of substitution is 5, what must be the price of apples be if the price of oranges was \$1? 2. Draw a consumer’s indifference curve diagram, showing an original budget line and a new budget line, and the original equilibrium and the new equilibrium for each of the following cases (considered separately). In each case, indicate how your diagram fits the specification of the case it illustrates. a) The consumer’s income falls, and his response indicates that X is an inferior good for him. b) The price of X and the price of Y both increase by 25%. c) The price of X falls by 20%. Although the consumer buys more X at the lower price, his demand for X is inelastic. 3. Syema spends all her disposable income on pizza and steak. Her demand curve for pizza is downward sloping. If Syema’s disposable income falls 25% because of a recession, does she necessarily consume fewer units of pizza? Explain your answer with an indifference curve diagram with pizza on the X-axis.

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2 4. Suppose that John consumes only two commodities: commodity X and commodity Y. a)
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Problem Set 04 (ECO100) - Prof Gustavo Indart Department of...

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