Economics 151A Winter 2010 Problem Set 1: Interpreting Regression Coefficients and Review of Microeconomic Theory Due January 12, 2009, BEGINNING of class 1. This problem will review basic consumer theory from Intermediate Microeconomics. a. Draw an indifference curve and budget constraint diagram that illustrates a consumer’s utility maximizing choice between food and clothing (assume these are the only two goods consumed). Put food on the vertical axis. b. Write an equation for the budget constraint, assuming total income is I, the price of food is P f , the price of clothing is P c , and the quantities of food and clothing are F and C. c. What condition involving marginal utilities of food and clothing must hold if the consumer is maximizing utility? d. On a new graph, draw representative indifference curves for two different consumers: Joe — who values fashion above all else, and is willing to give up a great deal of food in order to dress well, and Max —who loves to eat, and doesn’t particularly care what his
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