Shirley Sixpack, as you will recall, thinks that two 8-ounce cans of beer are exactly as good as one 16-ounce can of beer. Suppose that these are the only sizes of beer available to her and that she has $30 to spend on beer. Suppose that an 8-ounce beer costs $.75 and a 16-ounce beer costs $1. On the graph below, draw Shirley€™s budget line in blue ink, and draw some of her indifference curves in red.

(a) At these prices, which size can will she buy, or will she buy some of each? ____________
(b) Suppose that the price of 16-ounce beers remains $1 and the price of 8-ounce beers falls to $.55. Will she buy more 8-ounce beers? _________
(c) What if the price of 8-ounce beers falls to $.40? How many 8-ounce beers will she buy then? _________
(d) If the price of 16-ounce beers is $1 each and if Shirley chooses some 8-ounce beers and some 16-ounce beers, what must be the price of 8-ounce beers? __________
(e) Now let us try to describe Shirley€™s demand function for 16-ounce beers as a function of general prices and income. Let the prices of 8-ounce and 16-ounce beers be p8 and p16, and let her income be m. If p16 2p8, then the number of 16-ounce beers she will demand is ____. If p16 =
____ p8, she will be indifferent between any affordable combinations.

Transcribed Image Text:

8-ounce cans all 40 Blue budget line 30 20 Red curves ed curve 20 3040 16-ounce cans 10