TASK 2

FOR PRESENTATION

1.  Son has $150 to spend each week and cannot borrow money. He buys Malted Milk Balls and the composite good. Suppose that Malted Milk Balls cost $2.50 per bag and the composite good costs $1 unit.

  1. Sketch Son’s budget constraint.
  2. What is the opportunity cost, in terms of bags of Malted Milk Balls, of an additional unit of the composite good?
  3. Suppose that in an inflationary period the price of Malted Milk Balls increases to $1.50 per unit, but the price of Malted Milk Balls remains the same. Answer the questions a and b.

2.  Hung, a former actor, spends all his income attending plays and movies and likes plays exactly three times as much as he likes movies.

  1. Draw his indifference map.
  2. Hung earns $120 per week. If plays ticket costs $12 each and movie tickets cost $4 each, show his budget line and highest attainable indifference curve. How many plays will he see?
  3. If play tickets cost $12, movie tickets cost $5, how many plays will he attend?

3.  Connie has a monthly income of $200 that all she allocates among two goods: meat and potatoes.

  1. Suppose meat costs $4 per pound and potatoes costs $2 per pound. Draw her budget constraint.
  2. Suppose also that her utility function is given by the equation U(M, P) = 2M + P. What combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat and potatoes are perfect substitutes)
  3. Connie’s supermarket has a special promotion. If she buys 20 pounds of potatoes (at $2 per pound), she get the next 10 pounds for free. This offer applies only the first 20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes) are still $2 per pound. Draw his budget constraint.
  4. An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket ends its promotion. What does her budget constraint look like now? What combination of meat and potatoes maximizes her utility?

4.  Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D, F) = 10 DF. In addition, the price of a day spent traveling domestically is $100, the price of a day spent traveling in a foreign country is $400, and Jane’s annual travel budget is $4000.

  1. Illustrate the indifference curve associated with a utility of 800 and the difference curve associated with a utility of 1200.
  2. Graph Jane’s budget line on the same graph.
  3. Can Jane afford any of the bundles that give her a utility of 800? What a bout a utility of 1200?
  4. Find Jane’s utility maximizing choice of days spent traveling domestically and days spent in a foreign country.