Problems 1.Parvez, a pharmacology student, has allocated $120 per month to spend on paperback novels and used CDs. Novels cost $8 each and CDs cost $6.

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Presentation transcript:

Problems 1.Parvez, a pharmacology student, has allocated $120 per month to spend on paperback novels and used CDs. Novels cost $8 each and CDs cost $6 each. Draw his budget constraint. a.Draw and label a second budget line that shows what happens when the price pf a CD rises to $10. b.Draw and label a third budget line that shows what happens when the price of a CD rises to $10 and Parvez’s income rises to $240.

Problems 3.Anita consumes both pizza and Pepsi. The following tables show the amount of utility she obtains from different amounts of these two goods. Suppose Pepsi costs $0.50 per can, pizza costs $1 per slice and Anita has $9 to spend on food and drink. What combination of Pepsi and pizza will maximize her utility? Pizza QuantityUtilityMUMU/p 4 slices115 5 slices135 6 slices154 7 slices171 Pepsi QuantityUtilityMUMU/p 5 cans63 6 cans75 7 cans86 8 cans96

Problems 15.a.Draw a budget line for Lynne, who has a weekly income of $225. Assume that she buys food and clothes, and that food costs $15 per bag while clothes cost $25 per item. Add an indifference curve for Lynne that is tangent to her budget line at the combination of 3 items of clothing and 10 bags of food. b.Draw a new indifference curve for Lynne, showing what will happen if her tastes change, so that she gets more satisfaction from an extra item of clothing, and less satisfaction from an extra bag of food. c.Returning to the original tangency, what will happen if Lynne decides to join a nudist colony?