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Econ 3550 Fall 2010 Quiz 2 Key
1.
Assume Paula consumes Gasoline (P
G
= $5) and Water (P
W
= $2) and has an income of $120.
a.
(3 points) Graph Paula’s budget constraint below noting the relevant intercepts (putting
Gasoline
on the horizontal axis
). What is the slope of the budget constraint and what
economic relevance
does it have for Paula?
The slope of budget line is P
G
/P
W
=5/2 or 2.5.
The slope means that Paula HAS TO
give up 2.5 units of water to get one more unit of gasoline (or 5
water to get 2 gasoline).
b. (5 points) On the same graph
, draw in Paula’s
current indifference curve
assuming for her
current bundle (with 14 gasoline), the MV
G
(or MRS
GW
) = 2. Comparing the MV (or MRS) and
the price ratio, explain whether Paula is currently maximizing her utility or not. If she is not,
explain her decision rule for determining whether (and how) she should change her consumption.
Paula is not maximizing her utility at the current bundle because MV of Gasoline =2 (Water) is less than
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This note was uploaded on 03/14/2012 for the course ECON 2243 taught by Professor Henryfors during the Spring '12 term at Abant İzzet Baysal University.
 Spring '12
 henryfors

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