Question 2.4:

2.4Oscar is indifferent between living in Stockholm and London (his indifference curves are independent of his location). Assume that he only consumes two goods and that the relative price of these goods differ between Stockholm and London. His employer offers a wage in London such that he would be able to afford the same consumption basket in London as he would in Stockholm. Would he achieve the same, higher or lower utility in London than in Stockholm if we assume that his basket in Stockholm was chosen optimally? Explain using a figure with indifference curves and budget lines.

Below is _ONLY_ background information, (previous questions), no need to answer these!

2.3 After paying for rent and other necessities Emma has a budget (I) of 100 kronor each week that she can choose how to allocate between food (F) and entertainment (E). Assume that the price of F (P_F) is 10 kronor per unit and the price of E (P_E) 10 kronor per unit.

a)Draw Emma's budget constraint. If she buys 5 units of E, how much F can she afford?

b)Assume that her utility function is given by = Draw the indifference curve that corresponds to a utility level of 5 in the same diagram as a).

c)Assume that her budget increases to 200 kronor each week. Draw the new budget constraint. For this particular utility function (Cobb-Douglas) demand for F is given by 0.5*I / P_F (see GLS page 131-135 for a derivation) and equivalently for E. How much E and F will she consume at this higher income? What is her utility level?

d)Keep I at 100 and P_F at 10 kronor. Draw budget constraints and the optimal consumption of E for a number of different prices of E (using the optimal demand formula in d)). Use the same points to graph Emma's demand function for E.