EC 201 Intermediate Microeconomics Consumer theory hmwk2 1. Kim is your typical economics graduate student and consumes 2 goods: economics textbooks and coffee. Kim also earns a very typical grad student income, $40 a month. He can either spend it all on books and get 5, or he can spend it all on coffee and get 20 cups. a. Given this information, construct an equation for Kim's budget line(put books on x-axis and coffee on y-axis). b. The following are bundles that Kim can afford with his income: Books Coffee 1 0 8 2 Fill in the blanks in the table with quantities that will exhaust Kim's income. c. If his marginal utility of a book is 20, what is the marginal utility of coffee is he is maximizing his utility? d. Suppose textbooks and coffee are complements(rather strict complements) for Kim. For him to consume one textbook, he needs 1 cup of coffee. How many textbooks does he consume given his income of $40. e. Kim gets a research grant and his income increases to $80 a month. What is the new equation of his budget line? f. What if income stays constant at $40, and the price of a book increases to $10? How does this affect his budget line? 2. It's Halloween, and Sally is eating candy corn and drinking apple cider. Her preferences are that she loves candy corn and becomes happier as she eats more. She drinks apple cider if she has to, but additional glasses neither make her no better or worse off. a. Draw an indifference map which represents her preferences. b. The price of candy corn is $2 and the price of a glass of apple cider is $4. If Sally has $20 to spend on these two items, what is the equation of Sally's budget constraint. Draw the constraint. c. What combination of candy corn and apple cider will make Sally most happy(maximize her utility). 3. Suppose a consumer's utility function is such that U(x,y) = xy and we know that her income is $10, the price of x = $1 and the price of y = $1. If the Mux = y and MUy = x, determine the optimal bundle for this consumer given her income constraint