Principles of Economics W1105x-1 Fall 2009 Sunil Gulati Solution Set #2 1. The new budget constraint goes through Dave’s initial point of consumption, point A . It cannot have the same slope as indifference curve I 1 at this point – since the indifference curve cannot be tangent to two budget constraints with different slopes. As the figure shows, Dave can now reach a higher indifference curve, I 2 at point B , so he is better off. 2. Although Franklin had no explicit expense when he advertised in his own paper, he did incur a cost. The space for his own advertisements could have been used for paid advertisements by other firms. 3. a. Marginal cost, average variable cost, and average total cost will all increase; average fixed cost is unaffected. b. Marginal cost, average variable cost, and average total cost will all increase; average fixed cost is unaffected. c. Average fixed cost and average total cost will increase; marginal cost and average variable cost will be unaffected. d.
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