Reference no: EM13887810
Suppose Shiva has preferences, as indicated by the following: If he consumes more milk (M) than bread (B), then he will always be willing to give up 2 units of milk for 1 additional unit of bread to remain indifferent. If he consumes more bread than milk, however, every time he gives up 1 unit of milk he requires 2 additional units of bread to remain indifferent.
A. With the quantity of milk (QM) on the vertical axis and the quantity of bread (QB) on the horizontal axis, sketch a representative indifference curve for Shiva.
B. What is Shiva’s marginal rate of substitution at any bundle where QM > QB? What is Shiva’s marginal rate of substitution at any bundle where QM < QB?
C. Suppose the price of bread equals 1, the price of milk equals 1, and Shiva’s income is 100. How much milk and bread will Shiva consume in order to maximize his utility? Provide a graph to illustrate your answer.
D. Suppose the price of bread increases to 4, while the price of milk and Shiva’s income remain at the values in part B. How will this affect (i) Shiva’s optimal choice of milk and bread and (ii) his utility (i.e., will his utility increase, decrease, or remain the same)? Provide a graph to illustrate your answer.
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