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Question: question 1 louis the retired canadian lives on a fixed...

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Question 1: Louis the retired Canadian lives on a fixed budget and consumes only two goods: toques (T) and maple syrup (M). Suppose Louis monthly budget is 100 and the price of the two goods are (PT,PM) (4,2). (a) Make a properly labeled diagram illustrating Louisbudget constraint with T on the hori- zontal axis and M on the vertical axis. Indicate the area corresponding to the set of bundles (M, T) that Louis can afford. (b) What is the maximum T that Louis can afford? What about the maximum M? (c) What is the slope of the budget line, and what is the economic interpretation of it? (d) Suppose the Canadian government decides to ration maple syrup, limiting each person to mum of 40 units of maple syrup per month Draw a new diagram showing Louis a maxi new budget constraint and indicate the area corresponding to the set of bundles that Louis can afford now Question 2: Annie and Marty are both single parents with full-time jobs. Consequently, both value child care services (S) and childrens clothing (C) but may have different preferences for the two goods. The government decides it wants to make life easier for single parents and is considering providing single parents with monthly child care vouchers or, simply, providing single parents with a cash payment every month. Suppose Annie and Martys incomes are both 400, the price per unit of child care is 10 per unit and the price per unit of clothing is 20. (a) Draw Annies budget constraint assuming the government decides to offer a $100 voucher (b) Draw Martys budget constraint assuming the govenment decides to offer a $100 cash (c) Draw an indifference curve representing Annies preferences that is consistent with Annie (d) Draw an indifference curve representing Martys preferences that is consistent with Marty for child care. payment to single parents. strictly preferring the cash payment to the voucher. being indifferent between the cash payment and the voucher. Question 3: After winning the lottery, Australian Artie decides to retire, stay home, and watch sports on television all day. Artie likes both Rugby, R, and Aussie Rules Football, F and views them as imperfect substitutes. In particular, Arties preferences can be represented by the follow- ing utility function: U- RF6. Since Artie is rich, the only cost of watching F is the opportunity cost of not watching R: one hour of R necessarily means one hour less of F. In other words, evern though Artie is rich, there is still a price on his time 1-2 of 2
(a) What is Arties marginal rate of substitution between R and F, MRSRE? Interpret it (b) What is the price ratio, PR/PF? Interpret it (c) Suppose Artie chooses some bundle, (R, F). If this bundle maximizes Arties utility, what (d) Define MU, What is the interpretation of this? If Artie is maximizing his utility, what must (e) Suppose there are 24 hours in a day. What bundle (R, F) will Artie consume? Now you relationship must hold between R and F? MuL be equal to? should find actual numbers.] Question 4: Picky Pete drags Indifferent Ian out for coffee at an upscale Italian cafe which sells only espresso (E) and biscotti (B). Picky Pete simply must have one biscotti for every espresso consumed, whereas Indifferent lan views espresso and biscotti as perfect substitutes. One of their utility functions is given by U min E, B] and the othersby U E+B. (a) Given the description, which utility function corresponds to which person? (b) Suppose the prices of the goods are (PE PR) (21) and Pete has allocated $12 for the outing while lan brought only $4. Solve for each persons utility-maximizing bundle of espresso and biscotti. (c) Draw a fully labeled diagram illustrating Petes budget constraint, his optimal bundle, and an indifference curve representative of his utility at his optimal bundle. Indicate how much utility Pete obtains. (d) Do the same for lan Question 5: Energetic Erin consumes a worrisome amount of caffeinated beverages, particularly soda (S) and coffee (C). A utility function representing her preferences is given by 11 4SaAs Erins income is 120 and the prices of the two drinks are given by (Ps.Pc) (4,2) (a) Solve for Erins utility maximizing bundle of beverages and calculate how much utility she obtains from it. (b) Suppose Erin moves to Berkeley where there is a soda tax and, consequently, the price of soda is 6. Solve for Erins new utility maximizing bundle of beverages and calculate how much utility she obtains now. What is the total effect of the price change on Erins consumption of soda? (c) Draw a diagram showing Erins budget constraint before and after the move, and repre- sentative indifference curves of her choices before and after the move (d) The total effect you found in part b can be broken down into a substitution effect and an income effect. What is the sign of () the total effect, (ii) the substitution effect, and (ii) the income effect? Explain why for (i) and (iii). 1-2 of 2
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