Ohio ECON 4300 – Suppose that Steve and Jill, a married couple

| March 13, 2016

ECON 4300
Printed Name:
Homework #1
Due: Wednesday, Sept. 14
All answers must be typed into this document immediately following the respective question.
If including hand-written graphs and math, leave extra space where appropriate; all answers are to
be in the correct order.
Please retain the hard-returns such that each question begins on a new page.
1.) Suppose that Steve and Jill, a married couple, have decided to allocate $250 per month to their “home
decoration” budget which will be used to fund two types of decorations: i) the first involves antiques; ii)
the modern items. Both Steve and Jill have agreed to spend some money on each type of decoration.
However, the two differ substantially in their preferences. Jill doesn’t much care for the old dusty antique
items, but she thoroughly enjoys the look of modern decor. Steve loves the unique and classic looks of
antique items, but he finds it difficult to relate to modern-styled decorations.
a) Draw an indifference map representing Steve’s preferences (place “antiques” on the X-axis and
“modern decor” on the Y-axis). On a separate graph, draw an indifference map representing Jill’s
preferences. (Hint: the slopes will be different. The curves need not be precise; they are illustrative of the
two individuals’ relative preferences.)
b) Using the concept of marginal rate of substitution (MRS), explain why the two sets of indifference
curves look different from each other.

Pears

ECON 4300
Printed Name:
Homework #1
Due: Wednesday, Sept. 14
2.) The following figure shows the indifference curve for Ruth’s consumption of pears and peaches for a
given level of utility.

A

90

B

45

C

30

10

40

Ruth

U 100

160

Peaches

a.) Compute the marginal rate of substitution moving from Point-A to Point-B. Show your work.
b.) Compute the marginal rate of substitution moving from Point-B to Point-C. Show your work.
c.) What pattern is observed in the MRS as you move down and to the right along the indifference curve?
Using the concept of Diminishing Marginal Utility, explain why we should observe such a relationship.

)

ECON 4300
Printed Name:
Homework #1
Due: Wednesday, Sept. 14
3.) Use the information and the graph below to answer all sub-parts to this question:
Cappuccino (

QC

A
22

B
13
Mindy

C

1
4

16

32

U 50
Mindy

U 25

Gasoline ( Q G )

Assume:
Price of Cappuccino ( PC ) = $4.00
Price of Gasoline ( PG ) = $3.00
Mindy’s income (I) = $100
a.) Write out the equation for the budget line as a function of
value of the Y-intercept and the slope.

QC , such that QC = …. Identify the

b.) Determine Mindy’s marginal rate of substitution (MRS) at Point-B. Explain how you know this.
c.) Suppose Mindy told you that she is currently consuming at either Point-A, Point-B, or Point-C (but
she do not tell you which one). She also informs you that at her current consumption bundle her marginal
utility of gasoline is 16 while her marginal utility of cappuccino is 24. Given this information, at which
point can you conclude she is currently consuming? In order to maximize her utility, explain (using your
calculations) how Mindy should change her consumption bundle (Hint: I am looking for the qualitative
conclusion here—should she increase/decrease her consumption of gasoline and increase/decrease her
consumption of cappuccinos?).

ECON 4300
Homework #1
Due: Wednesday, Sept. 14
4.)

Printed Name:

0Liz
L

U 10

Pizza

L
U 20

B

L

U 40

D
E
C

U

S
10

A

U S40
S

U 30

0Susan
Hamburgers

a.) Define, in your own words (do NOT copy definition from text), what it means for an allocation to be
Pareto Efficient.
b.) Using the figure above, determine which of the labeled points are Pareto Efficient. Be sure to explain
why you claim each point is or is not Pareto Efficient.
c.) Define the term Pareto Improvement (strong version). Does a Pareto Improvement necessarily lead to
Pareto Efficiency? Why or why not?
d.) Starting from the initial allocation of resources at Point-A, determine whether a movement from PointA to each of the other four labeled points is a Pareto Improvement (strong version). Be sure to explain.

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