Sean and Yvette Durand live in Detroit and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the follow purple curves ₁ and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $1,000 per mo spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget con corresponding indifference curve. N 70 CO
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- 9. Income and substitution effects Sean and Yvette Durand live in Edmonton and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves I1 and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labelled point represents the tangency between a budget constraint and the corresponding indifference curve. DINER BREAKFASTS 48 40 26 BC 0 2 5 10 Z H BC FANCY DINNERS (?) The initial budget constraint (BC₁) shows the Durands' budget constraint when the price of a fancy dinner is $160. At this price, Sean and Yvette would choose to consume two fancy dinners. Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC2, which represents a new relative price of four diner breakfasts per fancy dinner. (Hint: The blue line labelled H is parallel to BC2 and…Ethan has $17 per week in his food budget. He splits his choices between pizzas and hot dogs. Each slice of pizza costs $2 while each hot dog costs $3. The total utility (TU) from each of these choices is set out in the table below. Marginal utility for pizza and hotdog (MU/$) for TU MU MU pizza hotdog Units TU pizza pizza hotdog 1 10 5 2 18 9 3 20 12 4 22 15 5 23 17 1. Complete the table calculating marginal utility (MU) and marginal utility per dollar (MU/$) for both choices. Remember to show your work for at least one unit! 2. What is Ethan's utility maximizing choice? Justify your answer by showing your work! HINT: use the budget constraint equation to show the optimal choice! (MU/$) for hotdogJoe is currently in consumer equilibrium by consuming cheese and crackers, such that the last cracker consumed yielded 8 utils and the last piece of cheese consumed yielded 12 utils. Assume the price of crackers is two cents per cracker and the price of cheese is three cents per piece. If the price of crackers increases to four cents, Joe should his consumption of crackers and his marginal utility from crackers will and also his consumption of cheese and his marginal utility from cheese will (Assume he is in the downward sloping portion of the MU curve.) Ο Ο Ο decrease; increase; increase; decrease increase; increase; increase; increase increase; decrease; increase; decrease increase; increase; decrease; decrease
- Suppose Kate has a weekly budget of $24 to spend on seltzer water and peanut butter. Seltzer water is priced at $2 per case, and peanut butter is priced at $6 per jar. If Kate spends her entire $24 on seltzer water, she can buy jars of peanut butter. Use the blue line (circle symbol) to plot Kate's budget constraint on the following graph. Next, use the orange point (square symbol) to shade the area that represents combinations of seltzer water and peanut butter that are affordable for Kate. Finally, place the black point (plus symbol) on the point on Kate's budget constraint that corresponds to a scenario in which Kate spends $12 on each good. Note: Dashed drop lines will automatically extend to both axes. PEANUT BUTTER (Jars) 24 22 20 18 16 14 10 4 2 0 0 + 2 + 6 8 10 12 14 16 SELTZER WATER (Cases) 18 cases of seltzer water. If she spends her entire $24 on peanut butter, she can buy 20 22 24 O BC, ($24) 0 Affordable Region + $12 on Each BC₂ ($48) (?)The budget set, or budget constraint, in the graph shows the possible combinations of brownies and ice cream cones that can be purchased. Assume that this person has a total of $18 to spend on brownies and ice cream cones. How much does a brownie cost? $ Assume that at point A, the marginal utility from a brownie is 10 and the marginal utility for an ice cream cone is 18. This person should consume more brownies and fewer ice cream cones. is utility maximizing. should consume more ice cream cones and fewer brownies.Your classmate tells you that he is indifferent between three soft drinks and two hamburgers or two soft drinks and three hamburgers - Draw a rough diagram of an indifference curve containing your classmate’s consumption choices. - Suppose that your classmate also states that he is indifferent two soft drinks and three hamburgers or one soft drink and four hamburgers, but that he prefers three soft drinks and two hamburgers to one soft drink and four hamburgers. Use your diagram from part (a) to reason out whether he can have these preferences.
- Suppose that Jones and Smith have each decided to allocate $1000 per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods. However, they differ substantially in their preferences for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games. a. Draw a set of indifference curves for Jones and a second set for Smith. b. Using the concept of marginal rate of substitution, explain why the two sets of curves are different from each other.I like drinking Smirnoff and Stoli Vodka, but I really only careabout the total amount of alcohol I get out of it. They areperfect substitutes. Smirnoff is sold in liter bottles that are100 proof (that’s 50% alcohol). Stoli is sold in liter bottlesthat are 80 proof (40% alcohol). What is my utility functionfor bundles of these two vodkas? What do my indifferencecurves look like?Cookie Monster loves cookies! The table shows how his utility varies with cookie consumption, but the table is missing some numbers (possibly because Cookie Monster also loves to eat many other things). Cookies consumed (cookies) Total utility (units) Marginal utility (units) 0 0 -- 1 100 100 2 250 3 390 140 4 530 5 630 100 6 75 7 70 Cookie Monster's marginal utility from the fourth cookie is unitsunits What is Cookie Monster's total utility when he eats 6 cookies? unitsunits Cookie number __________ tastes the best to Cookie Monster.
- Paolo enjoys consuming both soda and coffee. Each can of soda costs Ps = $1, and each cup of coffee costs Pc = $2. Suppose that Paolo buys 75 cans of soda and 50 cups of coffee per month. The following graphs show his marginal utility curves for soda and coffee. At his current consumption level, Paolo's marginal utility from consuming the last can of soda he bought is MUS = 12 utils per can, and his marginal utility from consuming the last cup of coffee he bought is MUC = 12 utils per cup. 24 20 20 16 25 50 75 100 125 150 25 50 75 100 125 150 SODA (Cans) COFFEE (Cups) Is Paolo currently maximizing his utility? O No; he likes coffee and soda more than other goods, so he should buy more of both. O No; he could buy less soda and more coffee, not spend any more money, and be better off. O Yes; the marginal utility he receives from his last can of soda equals that of his last cup of coffee. O No; he could buy more soda and less coffee, not spend any more money, and be better off. MU OF SODA…9. Income and substitution effects Rajiv and Simone are two friends living in Denver who love to try different restaurants in their city, but have specific preferences regarding venues for certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves 1₁ and 12 represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $1,000 available to spend on going out to eat, and further, that the price of diner brunch always $10. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. DINER BRUNCHES 0 0 5 6 N | M BC, UPSCALE DINNERS H BC₂ (?Shen is in a band and likes to advertise upcoming shows using flyers he posts around the city. Making one black-and-white flyer costs $0.05, and making a flyer in color costs $0.10. Shen budgets $25.00 for making flyers each month. The following graph shows three of Shen's indifference curves for the number of black-and-white and color flyers that he makes. Use the green line (triangle symbol) to plot Shen's budget constraint. Then, place the black point (plus symbol) on the graph to indicate Shen's optimal consumption choice given that budget constraint. 1000 900 Budget Constraint 800 700 600 Optimum 500 400 300 200 100 0 25 50 75 100 125 150 175 200 225 250 COLOR FLYERS BLACK-AND-WHITE FLYERS