microeconomics

5. Complements and substitutes Sean enjoys eating jelly sandwiches and drinking soda. He is particular about proportions, though: For every jelly sandwich he eats, he must drink exactly one glass of soda and vice versa. Sean can purchase the jelly for his sandwiches in two jar sizes, 500 grams and 1,000 grams. Sean cares only about the total amount of jelly he has available and not at all about the jar size. In other words, he's just as happy with two 500-gram jars as he is with one 1,000-gram jar. In this scenario, jelly sandwiches and glasses of soda are Two possible bundles of jelly sandwiches and glasses of soda are shown on the following graph, labelled A and B. Using three purple points (diamond symbol), plot Sean's indifference curve that passes through point A (1 ). Then, using three orange points (square symbol), plot Sean's indifference curve that passes through point B (12 ). Hint: To plot both indifference curves, place one point on the edge of the graph, another point on either point A or B respectively, and the final point on another edge of the graph.\f6. Indifference curves and utility maximization Caroline is in a band and likes to advertise upcoming shows using flyers she posts around the city. Making one black-and-white flyer costs $0.02, and making a flyer in colour costs $0.10. Caroline budgets $20.00 for making flyers each month. The following graph shows three of Caroline's indifference curves for the number of black-and-white and colour flyers that she makes. Use the green line (triangle symbol) to plot Caroline's budget constraint. Then, place the black point (plus symbol) on the graph to indicate Caroline's optimal consumption choice given that budget constraint.1000 A 900 Budget Constraint 800 700 GOO Optimum BLACK-AND-WHITE FLYERS 100 300 200 100 0 25 50 75 100 125 150 175 200 225 250 COLOUR FLYERS At the optimum that you indicated on the graph, Caroline's marginal rate of substitution is equal to in black and white per flyer in colour.7. MRS and utility maximization Eric lives in Montreal and loves to eat desserts. He spends his entire weekly allowance on yogurt and pie. A bowl of yogurt is priced at $1.75, and a piece of pecan pie is priced at $7.00. At his current consumption point, Eric's marginal rate of substitution (MRS) of yogurt for pie is 4. This means that Eric is willing to trade four bowls of yogurt per week for one piece of pie per week. Does Eric's current bundle maximize his utility-in other words, make him as well off as possible? If not, how should he change it to maximize his utility? O Eric could increase his utility by buying more yogurt and less pie per week. O Eric's current bundle maximizes his utility, and he should keep it unchanged. O Eric could increase his utility by buying less yogurt and more pie per week.8. Normal and inferior goods Poornima enjoys going to the theatre to see plays, and she also enjoys going to rock concerts. The following diagram shows two of Poornima's indifference curves for going to plays and concerts. With Poornima's initial budget constraint (BC1 ), she chose to go to four concerts and four plays per month (point X). Then her budget constraint shifted to BC2, and she chose to go to five concerts and five plays per month (point Y). 10 B PLAYS 5 A BC BC, 4 5 B 10 CONCERTSOf the following choices, which could have shifted Poornima's budget constraint from BC, to BC2? Check all that apply. O The prices of both theatre and concert tickets decreased while her income stayed the same. O The price of concert tickets increased while her income and the price of theatre tickets stayed the same. Her income increased while the prices of theatre and concert tickets stayed the same. O The prices of both theatre and concert tickets increased while her income stayed the same. Based on Poornima's consumption of plays and concerts after her budget constraint shifted, plays are goods and concerts are goods.9. Income and substitutlon effects Andrew and Beth Trimble live in Mississauga and enjoy going out to fancy restaurants for dinner and to diners for breakfast. 0n the mllowlng diagram, the purple curves 11 and I2 represent two of their indifference curvw for fancy dinners and diner breakfasts. They have $500 per month available to spend on eating out. The pride of a diner breakfast is always $5. Each labelled point reprgents the tangency between a budget constraint and the corresponding indifference curve. . DINER BREAKFASTS B l1 5 i" E FANCY DINNERS The initial budget constraint (BC1 ) shows the Trimbles' budget constraint when the price of a fancy dinner is $25. At this price, Andrew and Beth would choose to consume eight fancy dinners. Suppose that the price of a fancy dinner increases to $50, shifting their budget constraint to BC2, which represents a new relative price of ten diner breakfasts per fancy dinner. (Hint: The blue line labelled H is parallel to BC2 and tangent to /, at point M.) In order to remain as happy as they were before the price increase-that is, to consume at some point on the same indifference curve as they were on initially (/1 )-the Trimbles' income spent on fancy dinners and breakfast at diners would now have to be $ . However, in reality, rather than maintaining their original level of utility, the Trimbles choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in fancy dinners. On the following table, indicate which point movement represents the substitution effect and income effect for fancy dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Consumption Change Fancy Dinners Represented By... (Quantity of fancy dinners) Substitution Effect Income Effect In this case, the price increase of fancy dinners causes the Trimbles's real income to . Because of the change to Andrew and Beth's real income and the direction of the income effect, fancy dinners are for the Trimbles.10. Deriving demand from an indifference map Yvette lives in Edmonton and enjoys drinking lattes and eating scones. The price of a latte is held constant at $3 throughout this problem. On the following diagram, the purple curves (71 and 12 ) represent two of Yvette's indifference curves. The lines BC, and BC2 show two budget constraints. Points X and Y show Yvette's optimum consumption bundles subject to these budget constraints. 20 18 16 14 12 LATTES 10 CO BC, BC 2 B 10 12 14 16 18 20 SCONESUsing the income amount you previously computed, complete the following table by finding the price of a scone when BC, represents Yvette's budget constraint and when BC2 represents her budget constraint. Then indicate the quantity of scones consumed in each of those scenarios. Price Consumption When Yvette's budget constraint is... (Dollars per scone) (Scones) BC1 BC2 Given the price-quantity combinations from the previous table, use the blue line (circle symbol) to plot Yvette's demand for scones on the following graph. Hint: Assume that Yvette's demand for scones is a straight line. You should derive two points on the demand curve from the preceding graph. Then place the blue line on the following graph so that it passes through these two points.\fFrances has 80 hours per week to devote to working or to leisure. She is paid an hourly wage and can work at her job as many hours a week as she likes. The following graph illustrates Frances's weekly income-leisure tradeoff. The three lines labelled BC1 , BC2, and BCy illustrate her time allocation budget at three different wages; points A, B, and C show her optimal time allocation choices along each of these constraints. (? 1200 BOZ 800 INCOME (Dollars) BC 40 A 0 0 25 30 35 LEISURE (Hours)For each of the points listed, use the previous graph to complete the following table by indicating the hourly wage at each point and how many hours per week Frances will spend during leisure activities versus working. Wage Leisure Labour Point ( Dollars per hour) (Hours) (Hours) A BBased on the data you entered in the previous table, use the orange curve (square symbols) to plot Frances's labour supply curve on the following graph, showing how much labour she supplies each week at each of the three wages. 24 P 22 20 Labour Supply 18 16 14 WAGE (Dollars per hour) 12 10 CO 2 60 5 10 15 20 25 30 35 40 45 50 55 LABOUR (Hours)Suppose that Frances's initial budget line was BC2 and that it then changed to BC3 ; therefore, Frances's optimal time allocation choice shifted from B to C. As a result of this change, Frances's opportunity cost of leisure and she chose to consume leisure. Consequently, in this region, the effect dominates the effect. The corresponding portion of Frances's labour supply curve is