Q2. A consumer consumes only two goods, hamburgers and pasta, for which the consumer's preferences exhibit diminishing marginal rate of substitution. For this consumer, pasta and hamburgers are substitutes. On a clearly labeled graph, illustrate the income and substitution effects that result from an increase in the price of hamburgers.

Given how you have drawn this, what else can you say about the nature of the goods?

Q3. Kevin has a utility function given by U(x,y) = xy. The price of x is $4 and the price of y

is $2. Find the combination of x and y that minimizes Kevin's spending and ensures that Kevin receives at least 300 units of utility from his consumption of x and y.

4. Seeing an advertisement for widgets, Jonathan decides that it is really cool to consume widgets. On a graph, draw indifference curves to illustrate how seeing this ad has altered Jonathan's preferences. Label Jonathan's indifference curves before seeing the ad UB and his indifference curves afterwards UA. Label the axes.