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Tutorial 2 Solution - Tutorial 2 Solution 11 February 2009...

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(Chapter 3 including Appendix) Tutorial 2 - Rational Consumer Choice Consumerella is a girl who likes bling and things. Bling is expensive, (the price of bling is P b ) and other things (composite good T, price given by p t ) are relatively cheaper. If Consumerella's sweetheart provides her with income (m), please draw a budget constraint from the information given. a) The idea is just to get students to draw a generic (labelled) budget constraint with a steep slope, as the relative price of bling is greater than things Consumerella's beau has money to spare and would like you to confirm that his Bella 'Ella has rational preferences , as he has witnessed her sporting a ton of bling and but not very many other things... Using an indifference map, explain the theoretical condition that must hold for 'Ella to be considered a rational consumer, and be sure to mention the importance of the slope of the budget constraint and utility curve.
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