Microeconomics

Part 1. Short questions. For each question, provide both answer and explanation. 1. (5 points) Suppose Bill consumes bundles with two goods, gum and ambrosia. His original budget line is blue on the picture below, budget sets are shown in yellow. What changes in prices of the goods and/or his income can lead to the observed shift of his budget constraint from the blue line to the orange line? Gum budget set Ex. 2. (5 points) List the two rationality assumptions we make about consumer's preferences. Why do we make these assumptions in our analysis of consumer behavior? Ambro sia 3. (5 points) Consider the following graphs: Consumer 1 Consumer 2 Consumer 3 Consumer 4 Consumer 5 mm . These graphs depict the indifference maps for 5 different consumers facing the same budget constraint. The small arrow shows the direction towards preferable bundles. For which consumers would the consumption bundle A constitute an optimal choice? 4. (5 points) Assume that Jim is a rational consumer who consumes only two goods, apples (A) and nuts (N). His marginal rate of substitution (MRS) of apples for nuts is given by the following formula: MRS =A/N. That is, Jim's MRS is equal to the ratio of the number of apples consumed to the number of nuts consumed. Assume that Jim's income is $100, the price of nuts Py=$5 and the price of apples PA=$10. What quantities of apples and nuts will he consume given his income? Part [L Longer questions. 1. (I0 points) The consumption bundle consists of two goods, both of which are bads, not goods. Come up with an example of such two bads, and draw appropriately shaped indifference curves on a graph. Your preferences should satisfy the assumptions of completeness and transitivity, but not monotonicity (since they are bads)