2. Assuming that he is happiest when he earns three flat 1s, draw an indifference curve 4. Draw another indifference curve (label it /2). Indicate the new optimal point (label it (label it It) below that marks his optimal choice (label it A) of studying and movie Instructions: Analyze the following problems applying the theory of consumer behavior. When making indifference curves, remember their properties, ie., bowed inward to the watching. How many movies does he watch each week? origin, and sloped downward. No. of movies No. of movies A. Daniel is a diligent student who loves getting flat is, but he also loves watching movies. 70 70 Daniel is awake for 100 hours each week, and studying and watching movies are his only two How many movies does he 60 watch each week? 60 activities. Daniel must study for 20 hours per week for each flat 1 he earns. Each movie is 2 50 Answer: 50 hours long 40 40 1. Draw Daniel's budget constraint (label this budget constraint Bi) below that shows 30 30 the trade-off between the number of flat is he can receive and the number of movies 20 20 he can watch. 10 No. of flat 1s > No. of flat 1s No. of movies 70 How much is the maximum With the new semester beginning, Daniel decides to get his difficult requirements out of the 5. As to Daniel's decision, which effect dominates: income effect or substitution 50 number of flat is can he get? way. Each class now requires him to study for 25 hours per week to get flat 1. effect? Explain. 50 Answer: 40 3. Draw the new budget constraint (label it Bz) on your graph below. Assume Daniel still How much is the maximum wants to get three flat 1s. 30 number of movies can he 20 watch? No. of movies Answer: B. Consider a couple's decision about how many children to have. Assume that over a 10 70 No. of flat 1s How many movies can he now lifetime, a couple has 200,000 hours of time to either work or raise children. The wage is 250 60 watch? per hour, and raising a child takes 20,000 hours of time. 50 Answer: 1. Draw the budget constraint (label this budget constraint BCi) that shows the trade- 40 off between number of children (x-axis) and lifetime consumption (y-axis). (Ignore 30 the fact that children come only in whole numbers.) Show an indifference curve (label 20 it If) and an optimum choice (label it A). 10 No. of flat 1s3. It is observed that, as societies get richer and wages rise, people typically have fewer children. Still using the same diagram, illustrate this observation with a new Lifetime consumption indifference curve (label it /2) and a new optimum choice (label it B). 15,000,000 How much is the maximum lifetime consumption couples Lifetime consumption have? 15,000,000 T In your answer, how much is 10,000,000 the new maximum lifetime? How about the maximum Answer: number of children? 10,000,000 Answer: What about the number of 5,000,000 children? Answer: 5,000,000 > No. of children 10 15 2. Suppose the wage increases to 260 per hour. On the same diagram above, show how No. of children 10 15 the budget constraint shifts. Label the new budget constraint BCz. Lifetime consumption 4. Using above observation, which effect dominates in the decision of parents: income 15,000,000 effect or substitution effect? Explain. How much is the new maximum lifetime consumption couples now have? Answer: 10,000,000 5,000,000 > No of children 5 10 15