George Costanza, a typical New Yorker, works for Kruger Industrial Smoothing. His favorite snack food is a knish (X₁), a popular New York City treat. He particularly enjoys the knishes sold at Yonah Schimmel Knish Bakery on Houston Street where he can also get his favorite drink, homemade vanilla soda (X₂).

The price of a knish is $4, and the price of a homemade vanilla soda is $3.

Let us suppose George's preference for knishes and vanilla sodas is represented by the utility function: U (X₁, X₂) = 9X₁X₂

George's weekly allowance for knishes and vanilla sodas is $72. He must spend the entire amount each day to buy his knishes and sodas, i.e., he cannot save any of it. Q1: Consider three different consumption bundles:

X₁ = 12, X₂ = 6.

X₁ = 13, X₂ = 5.

X₁ = 14, X₂ = 4.

Here X1 is plotted on the horizontal axis and X2 is plotted on the vertical axis.

Based on the MRS expression you derived to answer the previous question, true or false, George's preferences exhibit diminishing MRS? a) True b) False

Q2: Given George's budget and the prices, how many servings of X₂ can he buy if he only chooses to buy X₂ (i.e., if he chose X₁ to be 0 units)?

a) X2 = 24

b) X2 = 18

c) X2 = 36

d) X2 = 12 Q3: What is the absolute value of the slope of George's budget line?

a) (1/2)

b) (3/4)

c) (4/3)

d) (3/8) Q4: Consider the following consumption bundles:

Bundle A: X₁ = 12 and X₂ = 6

Bundle B: X₁ = 12 and X₂ = 8

Bundle C: X₁ = 7 and X₂ = 15.

Given the information you have about George's weekly budget and the prices of X1 and X2, which of the three consumption bundles is likely to be George's optimal consumption bundle?

a) Bundle A b) Bundle B

c) Bundle C

d) Both bundles A and B.

Q5: With the help of your knowledge of microeconomic theory, can you identify which consumption bundle will maximize George's utility from his weekly consumption of knishes and vanilla sodas?

a) X1 = 6, X2 = 9

b) X1 = 9, X2 = 12

c) X1 = 18, X2 = 9

d) X1 = 6, X2 = 12 Q6: What is George's total level of utility when he buys and consumes the optimal combination of vanilla sodas and knishes?

a) U = 672

b) U = 924

c) U = 972

d) U = 1080