ProblemSet1(DueDate:March26)1.Forlunch,Adapreferstoeatsoupandbreadinfixedproportions.WhensheeatsXpintsofsoup,shepreferstoeatXouncesofbread.IfshehasXpintsofsoupandmorethanXouncesofbread,sheeatsallthesoupalongwithXouncesofbread,andthrowstheextrabreadaway.IfshehasXpintsofsoupandfewerthanXouncesofbread(sayYounces),sheeatsallthebreadalongwith2Youncesofsoupandthrowstheextrasoupaway.a)DrawAda’sindifferencecurvesbetweensoupandbread.b)Assumeshespendsallherincomeonsoupandbread.Plotherincome-consumptioncurve,herEngelcurveforsoup,andherEngelcurveforbread.c)Deriveherdemandfunctionforthetwogoods.[Notethatdemandfunctionisafunctionofpricesandincome].2.Garyhastwochildren,KevinandDora.Eachoneconsumes“yummies”andnothingelse.Garylovesbothchildrenequally.Forexample,heisequallyhappywhenKevinhastwoyummiesandDorahasthree,orwhenKevinhasthreeyummiesandDorahastwo.Butheishappierwhentheirconsumptionismoreequal.a)DrawGary’sindifferencecurves.b)Whatwouldtheylooklikeifhelovedonechildmorethantheother?c)SupposethatKevinstartsoutwithtwoyummiesandDorawitheightyummies,andthatGarycanredistributetheiryummies.Drawa“budgetline”thatshowshisavailablechoicesandindicatehisbestchoicebyaddingindifferencecurves.d)HowwouldyouranswerdifferifKevinstartedoutwithsixyummiesandDorawithfour?3.Conniehasamonthlyincomeof$200thatsheallocatesamongtwogoods:meatandpotatoes.a.Supposemeatcosts$4perpoundandpotatoes$2perpound.Drawherbudgetconstraint.b.SupposealsothatherutilityfunctionisgivenbytheequationU(M,P)=2M+P.Whatcombinationofmeatandpotatoesshouldshebuytomaximizeherutility?(Hint:Meatandpotatoesareperfectsubstitutes)c.Connie’ssupermarkethasaspecialpromotion.Ifshebuys20poundsofpotatoes(at$2perpound),shegetsthenext10poundsforfree.Thisofferappliesonlytothefirst20poundsshebuys.Allpotatoesinexcessofthefirst20poundsshebuys.Allpotatoesinexcessofthefirst20pounds(excludingbonuspotatoes)arestill$2perpound.Drawherbudgetconstraint.Whatcombinationofmeatandpotatoesmaximizesherutility?d.Anoutbreakofpotatorotraisesthepriceofpotatoes...
