Every morning Professor Gordon buys a bagel and a cup of

| September 3, 2016

Question
BUDGET CONSTRAINTS

1. Every morning Professor Gordon buys a bagel and a cup of coffee from

Peabody’s. At Peabody’s the price of bagels is $2.00 and the price of a cup of

coffee is $1.00.

a. Assuming that Professor Gordon has $20 to spend on coffee and bagels,

sketch her budget constraint, putting coffee on the x-axis and bagels on the

y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope

of the budget constraint.

b. Now, suppose that Peabody’s wants to encourage customer loyalty. To do

so they start the following program: every time someone purchases 10

cups of coffee, they get the 11th cup for free. Sketch Professor Gordon’s

new budget constraint under the assumption that she still has $20 to spend

on coffee. As above, put coffee on the x-axis and bagels on the y-axis.

Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the

budget constraint. In addition, if there are any changes in the slope of the

budget constraint, clearly identify the coordinates (i.e. the points) where

those changes occur. NOTE: Think about this one carefully.

2. Suppose that George is currently consuming 4 apples and 4 bananas. If the price

of apples is .25 and George spends $6 on apples and bananas, then what is the

price of bananas?

3. Suppose Dave has $100 to spend on entertainment every month and that Dave’s

favorite forms of entertainment are movies and concerts.

a. If the price of movies is $10 and the price of concerts is $20, draw Dave’s

budget constraint for entertainment, putting movies on the horizontal axis.

Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the

budget constraint.

b. Now suppose that the local theatre where Dave always goes to watch

movies offers the following special deal: Anyone who goes to more than

4 movies a month, can see any remaining movies in that month for half

price. Draw Dave’s new monthly budget constraint for entertainment.

Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the

budget constraint. In addition, if there are any changes in the slope of the

budget constraint, clearly identify the coordinates (i.e. the points) where

those changes occur.

4. Sketch the budget constraint for jeans and t-shirts under the condition that the

price of blue jeans is $50, and the price of t-shirts is $10 for the first 50 t-shirts

and then drops to $5 for any additional t-shirt. Assume that income is equal to

$1000. Put blue jeans on the y-axis and t-shirts on the x-axis. Label the xintercept,

the y-intercept and the slope of the budget constraint.

INDIFFERENCE CURVES

1. Suppose that Jeremy hates both mushrooms and tomatoes. In addition, assume

that the marginal disutility of mushrooms and tomatoes increases as Jeremy

consumes more of each. Sketch a few of Jeremy’s indifference curves and show

the direction in which Jeremy’s utility is increasing.

2. Suppose that Uncle Alvarez likes to eat raisin bran every morning for breakfast

but he doesn’t care if he eats Kellogg’s raisin bran or Post raisin bran. For him

they are perfect substitutes. Sketch at least three indifference curves for Uncle

Alvarez and show the direction in which his utility is increasing.

3. Suppose that Victoria hates chicken liver but loves filet mignon. Draw a few

indifference curves for Victoria. Put chicken liver on the x-axis and label the

direction in which Victoria’s utility is increasing.

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