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300hw1answer - b Because one unit of tea provides more...

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ECO 300 Hunter College Answer Key for Homework 1 2.3 To graph the indifference curves, use 2 U instead of U . U = 10 means 2 100 U C D = = . Hence, indifference curves are hyperbolas. a. b. See graph. c. D=10, 10 0 0 U = = d. If, say, spent half of income on D, half on C, would buy D=5, C=20. Utility would be 5 20 10 U = = which is less than 20. Trial and error shows that any other budgetary allocation provides even less utility than this. e. As in part d, Paul can buy 20 C and utility will be 10. f. Any other allocation yields less utility (see graph). 2.5
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a. The indifference curves here are straight lines with slope -4/3. Hence, the MRS is a constant 4/3. The goods are perfect substitutes
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Unformatted text preview: b. Because one unit of tea provides more utility than a unit of coffee, she will spend all of her income on tea when the prices are equal: T = 4, C = 0 . c. The graph shows that the indifference curves are steeper than the budget constraint, so maximum occurs on the T axis. d. With more income she would continue to buy only tea. If coffee prices fall to $2, coffee is now a cheaper way to obtain utility – one unit of coffee yields 3 units of utility at a cost of $2 so utility costs $2/3 per unit of utility. With tea, utility costs $3/4 per unit of utility....
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