Ans_HW3

# Ans_HW3 - Answer to Practice Homework 3 4.2 a If Ann is...

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Answer to Practice Homework 3 4.2 a) If Ann is spending all of her income then 7 14 2 22 2 8 22 2 = = = + = + C C C C F b) c) Yes, the indifference curves are convex, i.e., bowed in toward the origin. Also, note that they intersect the F- axis.

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0 10 20 30 40 50 60 70 80 0 5 10 15 20 25 30 35 Food Clothing U=36 U=72 d) e) The tangency condition requires that C F C F P P MU MU = Plugging in the known information yields F C F C = + = + 2 2 2 1 1 Substituting this result into the budget line, 22 2 = + C F results in
5 20 4 22 2 ) 2 2 ( = = = + + C C C C Finally, plugging this result back into the tangency condition implies that 12 2 ) 5 ( 2 = + = F . At the optimum the consumer chooses 5 units of clothing and 12 units of food. f) 2 1 12 1 5 1 , = + = + = F C MRS C F The marginal rate of substitution is equal to the price ratio. g) Yes, the indifference curves do exhibit diminishing , F C MRS . We can see this in the graph in part c) because the indifference curves are bowed in toward the origin. Algebraically,

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Ans_HW3 - Answer to Practice Homework 3 4.2 a If Ann is...

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