QUESTION 5 (10 Marks) Alto buys only books and Coffees and the Figure below shows his preference map: un Books w 9 10 Coffee a) (3 marks) If Alto chooses 3 books and 2 coffees, what is his marginal rate of substitution? b) (3 marks) If Alto chooses 2 books and 6 Coffees, what is his marginal rate of substitution? c) (4 marks) Do Alto's indifference curves display diminishing marginal rate of substitution? Explain why or why not. Page 6 of 9QUESTION 4 (15 Marks) Your friend is having a party Friday night and at the party there will be cheese and wine. Unfortunately, your friend is known for his entrepreneurial nature and will be charging $5 for a glass of wine and $2.5 for a slice of cheese. The table below shows the marginal utility that you derive from consuming successive amounts of each goods. (1) (2) Units of Wine MUwine Units of Cheese MU cheese MU cheese 22 18 19 16 12 OOHWU UI PW NH 10 UI P WN HA a) (3 marks) Which column, (1) or (2), would be consistent with you going to the party hungry? Why? b) (6 marks) What quantities of wine and cheese would you consume if you: i. Went to the party hungry with $30? Use the table provided below to calculate the appropriate MU per dollar spent. Briefly explain how you got your answer. MUw/Pw MUc/Pc ii. (6 marks) Went to the party hungry with $30? Use the table provided below to calculate the appropriate MU per dollar spent. Briefly explain how you got your answer. MUw/Pw MUc/Pc Page 5 of 9QUESTION 3 (10 Marks) Suppose the government wants to deter the consumption of energy drinks. It decides to introduce a 20 percent tax on the drinks. A survey shows that the demand for energy drinks is perfectly elastic and people are equally happy to stop consuming those drinks and switch to healthier alternatives (like coffee). Producers of energy drinks complain and say they will increase their prices by 20 percent. Explain, and illustrate with a graph (in the space provided below), why energy drinks producers are wrong. (Assume that the demand curve is horizontal at the price of $1 and that before the tax the supply curve intersects with the demand curve at a quantity of 3.4 million). 1.60 1.40 Price (dollars per drink] 1.20 1.00 0.80 0.60 o 2.8 3.0 3.2 3.4 3.6 3.8 4.0 Quantity (millions of drinks per year) Page 4 of 9