Draw an indifference curve diagram describing this consumer

Reference no: EM133395951

Question 1

A consumer describes their preferences in the following manner: "For me, there is no such thing as too much wine or too much cheese. (Note: your professor does not endorse this statement.) However, I always pair 1 glass of wine with 3 slices of cheese. I don't enjoy wine or cheese in any other manner but I also never get sick of pairing wine and cheese like this."

(a) Draw an indifference curve diagram describing this consumer's preferences. Put Wine on the x-axis.

IC1: The indifference curve containing the consumption bundle (2 wine, 8 cheese). Label the point representing this bundle as well.

IC0: An indifference curve containing bundles that are (strictly) less preferred to those on IC1.

IC2: An indifference curve containing bundles that are (strictly) more preferred to those on IC1.

(b) With (2, 8), this consumer could afford to give away some commodities and be no worse off. State which commodity and how many units they could give away.

Question 2

We study the choices of the same consumer from the previous question. This consumer has $100 to spend on the two goods. 1 glass of wine costs $0.50, and 1 slice of cheese costs $0.25.

(a) Draw an indifference curve/budget line diagram describing this consumer's choice problem. Include in your diagram the following:

IC1: The indifference curve representing the consumer's maximum feasible utility level. Label any and all intercepts with numerical values.

BL1: The budget line corresponding to the consumer's budget and prices. Label any and all intercepts with numerical values.

Point C1: The point representing the optimal consumption bundle.

(b) Solve for the optimal consumption bundle.

The price of cheese now rises to $0.50. Everything else stays the same.

IC2: The indifference curve representing the consumer's maximum feasible utility level, at the new prices. Label any and all intercepts with numerical values.

BL2: The budget line corresponing to the consumer's budget and (new) prices. Label any and all intercepts with numerical values.

Point C2: The point representing the new optimal consumption bundle.

Reference no: EM133395951

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