Marginal rate of substitution at this point

Assignment Help Business Economics

Reference no: EM13742710

Bob has $200 in income that he uses to purchase two goods – DVDs of classic movies and skinny ties. The price of a DVD is $20, and the price of a skinny tie is $4.

a. Draw Bob's budget constraint (put skinny ties on the horizontal axis). Bob’s preferences lead him to choose a combination of 4 DVDs and 30 skinny ties. Draw the indifference curve that leads him to this choice. What is his marginal rate of substitution at this point? Explain in words what this means.

b. Now assume Bob teaches an extra filmmaking class at the local community college, and his income doubles. Draw the new budget constraint. What do you think will happen to his consumption of classic movies and skinny ties? (Give a qualitative rather than a numerical answer. Show graphically and be explicit about any assumptions you are making.)

c. Now assume that the price of skinny ties rises to $6 due to a shortage of vintage clothing. Draw Bob's new budget constraint (going back to the original income of $200). What do you think will happen to his consumption of classic movie DVDs? What do you think will happen to his consumption of skinny ties? (HINT: there are multiple possible answers to one of these two questions.] Explain your answer.

Reference no: EM13742710

Questions Cloud

Endowment effects : Endowment effects. Surveys and experiments reveal that people sometimes demand much more to give up something that they have than they would be willing to pay to acquire it. To illustrate, contrast a situation in which people have an opportunity to “..

What rate of return did she receive on her investment : An investor bought a one-acre lot on the outskirts of a city for $9000 cash. Each year she paid $80 of property taxes. At the end of 4 years, she sold the lot for a net value of $15,000. What rate of return did she receive on her investment?

What nominal and effective annual rate of return : A well-known industrial firm has issued $1,000 bonds with a 4% coupon interest rate paid semi annually. The bonds mature 20 years from now. From the financial pages of your newspaper you learn that the bonds may be purchased for $715 each ($710 for t..

Indifference curve mapping with ice cream cones on x-axis : Suppose that a person always consumes 3 scoops of ice cream with 1 ice cream cone. Show such preferences in an indifference curve mapping with ice cream cones on the x-axis.

Marginal rate of substitution at this point : Draw Bob's budget constraint (put skinny ties on the horizontal axis). Bob’s preferences lead him to choose a combination of 4 DVDs and 30 skinny ties. Draw the indifference curve that leads him to this choice. What is his marginal rate of substituti..

Negligence rule is necessarily vague : “If the legal standard of care in a negligence rule is necessarily vague, the court should set it below the level of efficient precaution.” Explain the economic argument in favor of this proposition. Doctors are liable when their negligence injures p..

What is the socially optimal level of drugs bought and sold : Suppose Merck is developing new drugs that have positive externalities; the positive externality is a pharmaceutical technology we all benefit from. Let the supply curve for Merck’s production be P =Q/4, where Q is the number of units of drugs they’v..

Pay perfect expectation damages to the promise : Assume that the high costs of performing cause the promissory to breach a contract and pay perfect expectation damages to the promise. Would the promise have preferred that the promissory perform? Explain the gain in total payoffs from allowing the p..

Courts should refuse to enforce extremely unfair bargains : People often change the form of a promise in an attempt to increase their certainty that courts will enforce it according to its terms. For example, suppose the rich uncle in Example 1 wanted to assure his nephew of the enforceability of the promise ..

User Account

All Pages