Ann is initially endowed with 30 bananas and 30 apples. 

1. Assume p1 = p2 = 3. Write down Ann’s budget constraint and plot it in the graph. Show all bundles on the budget line for which Ann is buying the apples and selling bananas, and all bundles for which Ann is selling the apples and buying bananas.

 

2. Assume U(x1, x2) = x1x2 where x1 denotes bananas and x2 denotes apples. Find the indifference curve which passes through Ann’s endowment analytically (it means, calculate it) and find the MRS. Plot the indifference curve and the budget line in the corresponding diagram.

 

3. Now assume p2 = 2 and find the optimal choices of Ann for p1 = 1, p1 = 2, p1 = 3.

 

4. Is Ann buying or selling bananas under those 3 scenarios? Explain her exchange strategy comparing the MRS at her endowment point with the relative price.