Eco 1 Spring 2008 Problem Set 7 Answer Key This problem set is due in your recitation. 1) Consider the following consumption bundles, made up of combinations of cookies and milk: Consumption Bundle Glasses of milk Cookies Total Cost A 0 10 $5.00 B 1 8 $5.00 C 2 6 $5.00 D 3 4 $5.00 E 4 2 $5.00 F 5 0 $5.00 A) Using cookies on the horizontal axis, construct a Budget Constraint for consumption based on this information (and assuming our milk-and-cookie budget is $5.00). Identify the bundles on the Budget Constraint. CookiesGlasses of milk5432101 2 3 4 5 6 7 8 9 10FEDCBAB) We are told that (i) Bundle D maximises our utility subject to our Budget Constraint, (ii) We are indifferent between Bundle D and Bundle G (G = 4 glasses of milk and 3 cookies), but we cannot afford Bundle G. We can afford Bundle E, but that gives us less utility than Bundles D or G. Using Indifference Curves, illustrate these three bundles (either on the graph above, or a new graph below).
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