Comparing the slope of the budget line (Opportunity Cost of Good Y) with the slope of the Indifference Curve (Marginal Rate of Substitution) for a given bundle allows comparison between the value of a good in consumption vs. the value of the good in exchange. At point A, the Opportunity Cost or Relative Price of GoodY is:

Comparing the slope of the budget line (Opportunity Cost of Good Y) with the slope of the Indifference Curve (Marginal Rate of Substitution) for a given bundle allows comparison between the value of a good in consumption vs. the value of the good in exchange. At point A, the Opportunity Cost or Relative Price of GoodY is:

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.9P

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Mary has two dinner options available: eating a home cooked meal for $150 permeal, or at a restaurant for $260 per meal. Her weekly budget is $2500. i. Draw Mary’s budget constraint, (put home cooked meal on the horizontalaxis) showing the trade-off between a home cooked meal and eating at arestaurant. ii.Draw an indifference curve showing the optimum choice. Label theoptimum as point A. iii. What would be the marginal rate of substitution at the point thatcorresponds to the optimal consumption choice? Interpret the marginalrate of substitution
Mary has two dinner options available: eating a home cooked meal for $150 permeal, or at a restaurant for $260 per meal. Her weekly budget is $2500.i. Draw Mary’s budget constraint, (put home cooked meal on the horizontalaxis) showing the trade-off between a home cooked meal and eating at arestaurant. ii. Draw an indifference curve showing the optimum choice. Label theoptimum as point A. iii. What would be the marginal rate of substitution at the point thatcorresponds to the optimal consumption choice? Interpret the marginalrate of substitution. iv. Suppose the price of a home cooked meal increases to $200 and incomeincreases to $4200. Show the impact of the new budget line relative to theoriginal budget line. What would be the new marginal rate of substitutionthat corresponds to the optimal consumption choice? Interpret themarginal rate of substitution. Please refer to question iv.
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Q. 2 A student living in a university hostel has two options for meals: eating at the dining hall for Rs.600 per meal, or eating a meal at Dhaaba for Rs.150 per meal. His weekly food budget is Rs.6000. i) Draw the budget constraint showing the trade-off between dining-hall meals and meals at Dhaaba. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A. ii) Suppose the price of a Dhaaba meal now rises to Rs.200. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining-hall meals. Label the new optimum as point B. iii) What happened to the quantity of meals at Dhaaba consumed as a result of this price change? What does this result say about the income and substitution effects? Explain. iv) Use points A and B to draw a demand curve for meals at Dhaaba. What is this type of good called?
Suppose Tom and Jerry can buy/ sell apples at price Pa and bananas at price Pb. Both are price-takers. Given these prices, they seek to maximize utility by choosing how many apples and bananas to buy/sell. Tom's utility Ut (At,Bt)= log At + logBt s.t. Pa(At) + Pb (Bt) = 12 Pa + 6 Pb Jerry utility Uj (Aj,Bj)= log Aj + logBj s.t. Pa(Aj) + Pb (Bj) = 9 Pa + 15 Pb How many apples and bananas should Tom and Jerry consume? Answer in terms of Pa and Pb
Decomposing a Price Effect The indifference map below shows Tarzan’s preferences over “weapons of mass destruction” and a composite good for all other things that costs $1. Tarzan’s income is $24. The graph shows an increase in the price of weapons from $1 to $2, moving Tarzan from budget constraint B0 to budget constraint B1. The hypothetical budget constraint is B’. His optimal bundle on each budget constraint is given. ( Please look at photo, the graph, kindly ans a-e) a. Are weapons of mass destruction a normal good or an inferior good for Tarzan? Be clear about which budget constraints you compared. b. Are weapons of mass destruction a Giffen good for Tarzan? Be clear about which budget constraints you compared. c. What is the income effect resulting from the price increase? Be careful about sign. d. What is the substitution effect resulting from the price increase? Be careful about sign. e. Sketch Tarzan’s Marshallian demand curve for weapons of mass destruction. Label clearly…
Consider a couple's decision about how many children to have. Assume that over a lifetime a couple has 100,000 hours of time to either work or raise children. The wage is $10 per hour. Raising a child takes 10,000 hours of time. a. Make a graph with the budget constraint showing the trade-off between lifetime consumption and number of children. (Ignore the fact that children come only in whole numbers!) Show indifference curves and an optimum choice. b. Suppose the wage increases to $15 per hour. Show how the budget constraint shifts. Using income and substitution effects, discuss the impact of the change on number of children and lifetime consumption. c. We observe that, as societies get richer and wages rise, people typically have fewer children. Is this fact consistent with this model? Explain.