Problem Set 3 1. Shirley, as you will recall, thinks that two 8-ounce cans of beer are exactly as good as an 16-ounce can of beer. Suppose that these are the only sizes of beer available to her and that she has $30 to spend on beer. Suppose that an 8-ounce beer costs $.75 and a 16-ounce beer costs $1. a. Draw Shirley’s budget line in blue ink and draw some of her indifference curves in red. At these prices, which size of beer will she buy, or will she buy some of each? b. Suppose that the price of 16-ounce beers remains $1 and the price of 8-ounce beers falls to $.55. Will she buy more 8-ounce beers? c. What if the price of 8-ounce beer falls to $.40? How many 8-ounce beers will she buy then? d. If the price of 16-ounce beers is $1 each and if Shirley chooses some 8-ounce beers and some 16-ounce beers, what must be the price of 8-ounce beers? e. Write Shirley’s demand function for 16-ounce beers as a function of general prices and income. 2.
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This note was uploaded on 11/26/2011 for the course ECONOMICS 101 taught by Professor Dean during the Spring '09 term at University of the Philippines Diliman.