a) Darcie’s total income is $40. If she buys 30 magnets and 5 cheeseburgers under the new prices she will be spending $40. Therefore, she can afford this bundle since it is within her income.
b) Since this bundle exhausts Darcie’s income, she is not wasting her resources so this is a viable choice for her (what the actual choice will be depends on her preferences).
c) Yes, there are two effects at work when price changes. First, the substitution effect will cause Darcie to substitute towards more of the cheaper good. The law of demand causes her to decrease her quantity demanded of cheeseburgers, and increase her quantity demanded of magnets. The income effect causes her relative purchasing power to change. A higher price of a cheeseburger will weaken her purchasing power, while the lower price of magnet will increase her purchasing power.
d) Yes, the marginal utility of a dollar spent on each good is equal.
a)
C
= 20-4B
b)
|
Books |
Coffee |
|
1 |
16 |
|
5 |
0 |
|
3 |
8 |
|
2 |
12 |
c)
C
= 40-4B, C = 20-5B
d)
MU(coffee)
= 5
e)
B
= C = 4, B=10/3 and C= 20/3
Multiple Choice
1. (c)
2. (a)
At the current bundle, the slope of Christina’s indifference curve is steeper than her budget line, indicating that she is not at her optimal bundle (i.e. she is not at a tangency). She can move to a higher indifference curve if she consumes less hot pants and more eyeshadow. Picture a movement along the budget line that leads to a higher indifference curve.
3. (d)
The key to this question is recognizing that along an indifference curve, the utility is constant. Moving from one bundle to another will result in the same utility because the gain in marginal utility of another pie should offset the loss in marginal utility of forgoing another burrito. If Laura moves to the a consumption bundle with 4 pies and 8 burritos, she has a loss of –10 from consuming one less pie, and a gain of +5 from consuming another burrito. Since the loss is greater than the gain in moving to this consumption bundle, then Laura is on a lower indifference curve.
4. (c)
The graph shows that hummus is twice as expensive as broccoli. The slope of the graph is equal to the ratio of the relative prices. (Change in broccoli/Change in hummus) = price of hummus/price of broccoli). If the price of broccoli is $4, hummus would be twice as expensive at $8.
5. (d)
6. (e)
7. (c)