Reference no: EM133079307
Question - Christmas is coming! Muffin, a three-year-old girl, is eagerly waiting for her presents. Muffin cares only about two goods: Books (good x) and Moonlight Unicorns (good y). Books cost $10 (ten dollars) each while Moonlight Unicorns cost $50 (fifty dollars) each. Muffin has two hundred dollars ($200) as her income.
(a) Draw Muffin's budget line, clearly indicating its intercepts and slope. Label this budget line by "(a)".
(b) Muffin's mother, Trixie, wants to give Muffin five (5) books as Christmas presents. Assume that Muffin cannot resell these books. In a separate diagram, draw Muffin's budget line if she receives this present. Indicate all critical points of this budget line.
(c) In the madness of Christmas shopping, Trixie has forgotten to buy the books. So instead of five books she gives Muffin $50 (fifty dollars) in cash as a Christmas presents. In a separate diagram, draw Muffin's budget line after this gift of cash (but without the books described in part (b)).
(d) Do we know if Muffin (weakly) prefers the present in part (b) or that in part (c)? Why?
(e) Given your answer to part (d), suggest one (1) reason why people may give gifts in kind (i.e., a gift in the form a particular goods) instead of gifts in cash?
(f) Suppose Muffin chooses five (5) books and three (3) Moonlight Unicorns under the situation in part (a). Assume also that she receives no Christmas present. If the price of books increases to $15 (fifteen dollars) each while the price of Moonlight Unicorns remains unchanged, how much income does Muffin need to be able to just afford her old consumption bundle? Draw the budget line with the new prices and the income you have calculated on the same diagram for part (a). Indicate all critical points. Label the new budget line by "(f)".
(g) Is Muffin (weakly) better off under the part (a) budget line or the part (f) budget line? Why?
(h) Give an example of Muffin's consumption bundle under the part (f) bud- get that would violate the Weak Axiom of Revealed Preference (WARP). Explain your answer.
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