Reference no: EM133195287 , Length: 2 Pages

Assignment:

Question 1a.

Jamie likes consuming beer and wine. He does not consume anything else (unfortunately for his liver). Let xb be the liters of beer and x_w the liters of wine he consumes per week. His preferences can be represented by a utility function given by: u(x_b, x_w) = x_b + x_w.

a. Find and draw the indifference curve that passes through the bundle (x_b = 4, x_w = 6). Find and draw the indifference curve that passes through the bundle (x_b = 8, x_w = 12).

b. What is Jamie's marginal rate of substitution? Is the MRS diminishing along his indifference curves?

c. Rank the following 4 bundles: (9,3); (4,6); (5,5); (12,1)

Question 1b.

Redo Question 1_a with u(x_b, x_w) = min {x_b; x_w}.

Question 2

Max's preferences over beer and chicken wings are represented by the following utility function u(b, w) = 4√b + 2w;

where b denotes the quantity of beer and w the quantity of wings consumed by Max.

The marginal utilities of beer (MUb) and wings (MUw) are given by

MU_b = 2 √b

MU_w = 2

Max's parents give him a monthly allowance of I = 100, the price of beer is p_b = 10 and the price of wings is p_w = 20.

a. Draw Max's budget line in a well-labeled diagram. Also draw the indifference map associated with these preferences in the same diagram. (Put beer on the x- and wings on the y-axis.)

b. What is Max's optimal consumption bundle?

Explain why Max should not spend all his money on beer.

c. Assume that the price of wings increases to p˜_w = 40. What is Max's optimal consumption bundle now? Explain.