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Directions: Each question gives you a scenario and asks you to graph, and/or analyze certain concepts from our lectures on Preferences and Utility Maximization. 1.
Directions: Each question gives you a scenario and asks you to graph, and/or analyze certain concepts from our lectures on Preferences and Utility Maximization. 1. Pikachu has an income of $200. Pikachu is going to the market with his income and will purchase ketchup ($4 per bottle) and apples (82 per apple). Draw Pikachu's budget line, and label bundles of ketchup and apples that are affordable and not affordable. Label important parts of the graph like how much ketchup Pikachu and purchase if he purchases no apples and how many apples he can purchase if he purchases no ketchup. Pikachu likes ketchup and apples about equally well and his preferences over the two are convex (Cobb-Douglass). Draw an example indifference curve and label the region with bundles of ketchup and apples that Pikachu prefers to the ones on the indifference curve, and label the region where points are less preferred compares to the ones on the indifference curve. Now draw Pikachu's budget line on the same graph with the indifference curve that contains his utility maximizing point. Show how Pikachu's consumption changes if the price of apples increase to $3 and Pikachu's income increases to $220. With this new income ($220) and assuming the price of apples is fixed at $3, use utility maximization to trace out Pikachu's demand curve for ketchup
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