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eco204_HW_1

# eco204_HW_1 - 1 ECO 204 2008‐2009 Ajaz Hussain HW 1...

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Unformatted text preview: 1 ECO 204 2008‐2009 Ajaz Hussain HW 1 Question 1 (Based on 2007‐2008 Final Exam) In a marketing survey, customers were asked about their preferences over cigarettes and coffee. The results indicate that customers perceive cigarettes and coffee to be pleasurable (‘good’ goods) and have increasing marginal rate of substitution. Graph these customer’s indifference curves. Question 2 (Based on Summer 2008 Final Exam) If Ajax if doesn’t have at least 5 pounds of food a day, he will die. In fact, with less than 5 pounds of food a day, he doesn’t care about anything else. Suppose that once he has the threshold level of food: (a) He prefers food and everything else as perfect complements. Graph Ajax’s indifference curves. (b) He prefers food and everything else as imperfect substitutes with decreasing MRS. Graph Ajax’s indifference curves. (c) He prefers food and everything else as perfect substitutes with MRS of ‐1. Graph Ajax’s indifference curves. (d) He prefers food and everything else as perfect substitutes with MRS of ‐1/2. Graph Ajax’s indifference curves. (e) He only cares about everything else. Graph Ajax’s indifference curves. ECO 204, 2008‐2009. Ajaz Hussain. Department of Economics, University of Toronto 2 (f) He reaches a “bliss point” at 10 lbs of food a day (Ajax needs to go on a diet!) and 5 units of everything else. Graph Ajax’s indifference curves. What assumption about preferences is being violated? Question 3 After giving really hard tests in his ECO 200 class, Carlos loves to go out and celebrate. He likes Porterhouse steaks with Château Mouton Rothschild 1986 wine. Let wine be on the x‐axis and steak on the y‐axis. Draw Carlos’ indifference curves given that as he has more steaks, he prefers to have more glasses of wine per steak. ECO 204, 2008‐2009. Ajaz Hussain. Department of Economics, University of Toronto ...
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