Econ 349 > Answer Key for Problem Set 2
1. Indifference curves for a given individual can not cross each other because it would violate transitivity and rationality.
2. Yes, please explain this one!
3. Volkswagens are less expensive than Mercedes-Benzes!
4. Indifference curves: in each of these examples, it's assumed that
hamburgers are measured on the horizontal axis.
a) upward sloping curves (bowed away from the vertical axis) with the direction of higher utility to the northwest.
b) negatively sloped linear indifference curves with the direction of higher utility to the northeast.
c) downward sloping curves (bowed away from the origin) with the direction of higher utility to the southwest.
d) upward sloping curves (bowed away from the horizontal axis) with the direction of higher utility to the southeast.
6. We did this in class.
7. Ms Phashun: If forced to buy at least C-min clothing, then her utility (U2) is lower than if she could freely allocate her income at U1.
11. We did this one in class.
13. We did this one in class.
14. We did this one in class.
15. This is similar to #3 above. There is a difference between "willingness to buy" and "ability to buy". That’s what demand curves are all about.
16. Ian initially locates at a corner solution with U1. When his income rises to $80,000, Ian buys one car with utility U2.
17. Bugs Bunny: Bugs initially locates at point A with utility U1. After the price of carrots increases, the budget line pivots inward and forces Bugs to relocate to point C with utility U2. The substitution effect is from A to B along the original utility curve. The income effect is from B to C (where the red line is the hypothetical budget constraint).
18. a) MRS = -3/1 (if you plot fajitas on the x-axis); b) MRS = -6/1
22. This question calls for a corner solution. You can illustrate corner solutions using the normal convex indifference curves rather than the concave curves.
23. We did this one in class.
24. Intertemporal choice. Point E (where the red lines cross) is the endowment of 1/3 k in year 1 and 2/3 k in year 2. A positive interest rate will rotate the budget line around the endowment point E so that the line is flatter (assuming year 2 consumption is measure on the horizontal axis).
25. Last year's budget line is in blue (and his utility was U1). This year's budget line is in red (and his utility is U2). This year's consumption of grapes must be lower than last year's. This is because grapes are more expensive this year, hence Mr. Mathers has an incentive (substitution effect) to sell more of his grapes on the market rather than consume them himself.
26. This is very similar to #23 above.
27. Mister Convex (aka Jonathan) should be the one buying some of both types of records. Mister Concave (aka Ke) will locate at a "corner solution" and only buy one type of music.
28. Hannah's initial choice is shown below with utility U1. When the two "free" candy bars are taken away, Hannah's choice depends on whether spinach is a normal or inferior "bad". Where do you think she'll end up under either scenario?
29. Cort initially choose a 1-bedroom apartment (which leaves her with $1500 of AOG). After the subsidy, the price of apartments falls to $250 and, let's say, she chooses a 2-bedroom apartment. I've not shown the indifference curves so as to keep the graph clean. If, instead, Cort is simply given the cash equivalent value of the subsidy (which is $500 for two rooms), her budget line becomes the red line. It is possible to draw a set of indifference curves such that Cort would rather have the straight cash subsidy instead of the reduced price housing (in other words, she could get to a higher indifference curve on the upper segment of the red line).
30. Telephone pricing.
a) Note that the x-axis is not drawn to scale.
b) The cost of an additional 20 minutes depends on how many minutes you are currently calling.
If you are currently calling 40 minutes per month, then an extra 20 minutes would cost you $2.50. If you are currently calling 140 minutes, then an extra 20 minutes would cost you $7.50.