Q1. The budget constraint shows all possible combinations of two goods that may be purchased given income and the prices of the two goods.

1. Describe the effect of a price change on the budget constraint.
2. Describe the effect of an income change on the budget constraint.

Q2. An indifference curve shows all the bundles of two goods that give an individual equal total utility.

1. Describe the characteristics of indifference curves.
2. Describe the slope of an indifference curve in terms of the marginal rate of substitution.

Q3. Jake enjoys consuming both cheese and fruit. Each pound of cheese costsP_C=$1, and each pound of fruit costsP_F=$2. Suppose that Jake has $200 per month to spend on cheese and fruits.

1. Calculate and graphically represent Jake's budget constraint.
2. The revenue Jake spends on cheese and fruit increased to $400 per month. Graph the new budget constraint. Do you know how economists call this effect?

Q4. Explain why indifference curves: (a) are downward-sloping, (b) are convex to the origin, and (c) do not cross. Name and explain the assumptions that make those characteristics possible.

Q5. Suppose that the utility function is: xy=U U: the level of utility x and y: consumption of goods x and y Suppose also that: R= 40, Px=5, Py=10 R: revenue Px and Py: the market prices of good X and Y.

1. Determine and graphically represent the budget constraint of this consumer

2. Suppose three levels of utility: U1, U2, and U3. For each of the following cases, calculate the bundles and trace the utility curves. a) U1=4 Points: A1(x=2) B1(x=4) C1(x=8) b) U2=8 Points: A2(x=2) B2(x=4) C2(x=8) c) U3=16 Points: A3 (x=2) B3(x=4) C3(x=8)

Q6.

1. Determine and graphically represent the budget constraint of this consumer

2. Suppose three levels of utility: U1, U2, and U3. For each of the following cases, calculate y and trace the utility curves. 20 a) U1=4 Points: A1(x=2) B1(x=4) C1(x=8) b) U2=8 Points: A2(x=2) B2(x=4) C2(x=8) c) U3=16 Points: A3 (x=2) B3(x=4) C3(x=8).

3. Graphically determine the consumer's choice or the utility optimum.

4. Calculate the MRS between A1 and B1 and between B1 and C1 (U1 utility curve), then the MRS between A2 and B2 and between B2 and C2 (U2 utility curve). Comment your results.