Economic Problem

9474 WordsDec 11, 201238 Pages
CHAPTER 4 INDIVIDUAL AND MARKET DEMAND EXERCISES 1. An individual sets aside a certain amount of his income per month to spend on his two hobbies, collecting wine and collecting books. Given the information below, illustrate both the price-consumption curve associated with changes in the price of wine and the demand curve for wine. |Price |Price |Quantity |Quantity |Budget | |Wine |Book |Wine |Book | | |$10 |$10 |7 |8 |$150 | |$12 |$10 |5 |9 |$150 | |$15 |$10 |4…show more content…
In this case, the consumer always purchases the cheaper of the two goods (assuming a one-for-one tradeoff). If the price of orange juice is less than the price of apple juice, the consumer will purchase only orange juice and the price-consumption curve will lie along the orange juice axis of the graph (from point F to the right). [pic] If apple juice is cheaper, the consumer will purchase only apple juice and the price-consumption curve will be on the apple juice axis (above point E). If the two goods have the same price, the consumer will be indifferent between the two; the price-consumption curve will coincide with the indifference curve (between E and F). Assuming that the price of orange juice is less than the price of apple juice, the consumer will maximize her utility by consuming only orange juice. As income varies, only the amount of orange juice varies. Thus, the income-consumption curve will be the orange juice axis in the figure below. If apple juice were cheaper, the income-consumption curve would lie on the apple juice axis. [pic] 4. b. Left shoes and right shoes are perfect complements. Draw the appropriate price-consumption and income-consumption curves. For perfect complements, such as right shoes and left shoes, the indifference curves are L-shaped. The point of utility maximization occurs when the budget
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