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.
Cookies
Glasses of
milk
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
F
E
D
C
B
A
B) 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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