1) Suppose I go on a week-long vacation and, when I arrive at the airport on the island, I must choose between either renting a car or taking a taxi to our hotel. Renting a car involves a fixed fee of $400 for the week, with each mile driven afterward just costing $0.40, which is the price of gasoline per mile. Taking a taxi involves no fixed fees, but each mile driven on the island during the week now costs $1 per mile. Suppose I brought $2,000 on my trip to spend on "miles driven on the island" and "other goods." Note that the price of "other goods" is normalized to $1. a. On a graph with miles driven on the horizontal and other consumption on the vertical axis, illustrate my budget constraint assuming I chose to rent a car. What is the relative price of each mile driven? b. On the same graph from part (a), illustrate my budget constraint assuming I chose to take taxis. What is the relative price of each mile driven? c. Explain when I should rent a car.

2) The U.S. government has a food stamp program for families whose income falls below a certain poverty threshold. Food stamps have a dollar value that can be used at supermarkets for food purchases as if the stamps were cash, bit the food stamps cannot be used for anything other than food. Suppose the program provides $500 of food stamps per month to a particular family that has fixed income of $1,000 per month to spend on "food" and "nonfood items." Note the prices of "food" and "nonfood items" are normalized to $1. a. With "food" on the horizontal axis and "nonfood items" on the vertical, illustrate this family's monthly budget constraint. b. How would this family's budget constraint differ if the government replaced the food stamp program with a cash subsidy program that simply gave this family $500 in cash instead of $500 in food stamps? Which would the family prefer? c. How would the budget constraint change if the government simply agreed to reimburse the family for half its food expenses? d. If the government spends the same amount for this family on the program described in (c) as it did on the food stamp program, how much food will the family consume?

3) Show their optimal bundle using consumer choice diagrams (Indifference Curves and Budget Lines). Be sure to show how you calculated the slopes and end points. A. Jon is a caffeinated-cola drinker who spends his entire soft drink budget on Coca-Cola and Jolt cola and cares only about total caffeine content. If Jolt has twice the caffeine of Coke, and if Jolt costs $1/pint and Coke costs $0.75/pint, how will Jon spend his soft drink budget of $15/wk?

B. Suppose Sam has $3,600 to spend on skies and bindings each year. Find her best affordable bundle of skis and bindings for each preference assumption described below. Skies are $480 per pair and bindings are $240 per pair. Sketch them in one diagram. a. Assume Sam wears out one pair of skis for every pair of bindings she wears out. b. Now assume that she is such an aggressive skier that she wears out two pairs of skis for every pair of bindings she wears out