Question
A consumer has income of 3000. Bread is priced at 3 a loaf and potatoes priced at 6 a kilo. a. Draw the consumer's budget
A consumer has income of 3000. Bread is priced at 3 a loaf and potatoes priced at 6 a kilo.
a. Draw the consumer's budget constraint. What is the slope of this budget constraint?
b. Draw a consumer's indifference curves for bread and potatoes. Pick a point on an indifference curve for bread and potatoes and show the marginal rate of substitution. What does the MRS tell us?
c. Show the optimal consumption choice. What is the MRS at this optimum?
d. The price of potatoes rises from 6 to 10 a kilo, while the price of bread remains at 3 a loaf. For a consumer with a constant income of 3000, show what happens to consumption of bread and potatoes. Decompose the change into income and substitution effects.
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