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HW3 - Abigail Palmer HW 3 Homework#3 1 Suppose that Bridget...

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Abigail Palmer HW 3 September 14, 2007 Homework #3 1. Suppose that Bridget and Erin spend their income on two goods, food (F) and clothing (C). Bridget’s preferences are represented by the utility function U ( F , C ) = 10 FC , while Erin’s preferences are represented by the utility function U ( F , C ) = .20 F 2 C 2 . a. On a graph, with food on the horizontal axis and clothing on the vertical axis, identify the set of points that give Bridget the same level of utility as the bundle (10,5). Do the same for Erin on a separate graph. b. On the same two graphs, identify the set of bundles that give Bridget and Erin the same level of utility as the bundle (15,8). c. Do you think Bridget and Erin have the same preferences or different preferences? Explain. Bridget and Erin seem to have the same preferences, according to the graphs. However, Erin does receive more utility based on her utility function at any given combination of products.

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Abigail Palmer HW 3 September 14, 2007 2. Antonio buys 5 new college textbooks during his first year at school at a cost of \$80 each. Used books cost only \$50 each. When the bookstore announces that there will be a 10% increase in the price of new books and a 5% increase in the price of used books, Antonio’s father offers him \$40 extra. a. What happens to Antonio’s budget line? Illustrate the change with new books on the vertical axis. Antonio’s budget line shifts slightly to the right at an angle. He can still buy up to 5 new
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HW3 - Abigail Palmer HW 3 Homework#3 1 Suppose that Bridget...

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