Question two

Martha has $33 to spend on two goods--donuts and fruit juice. Donuts costs $4 per piece and fruit juice cost $5 per bottle. The table below provides Martha's total benefits from consuming the two goods. Donuts I Fruit Juice Qty Total Benefit Qty Total Benefit 40 1 20 2 76 2 39 W 108 3 57 A 136 4 74 UT 162 90 186 105 202 119 214 8 132 9 222 9 144 10 226 10 155 i. Using the information provided, graph Martha's budget constraint. (1 mark)ii. Given a budget of $33 and the prices of donuts and fruit juice as well as the total benefits from consumption as provided above, what is Martha's optimal consumption bundle? (4 marks) iii. Suppose Martha's budget increases to $62. Graph the new budget constraint, labelling your diagram properly. Given the new budget of $62 (holding prices and total benefits from consumption constant as above), what is Martha's new optimal consumption bundle? (4 marks) iv. Comparing your solutions from part (ii) with part (iii), is this consistent with donut being a normal good, or an inferior good? Is it consistent with fruit juice being a normal good or an inferior good? (2 marks) v. Suppose Martha's budget returns to $33, and the price of fruit juice falls to $3 per bottle. Graph the new budget constraint. Given the budget of $33 and prices of $4 per donut and $3 per bottle of fruit juice (holding total benefits constant), what is Martha's new optimal consumption bundle? (3 marks) vi. Considering your solutions from part (iv) ad part (v), is this consistent with donut and fruit juice being complements, or substitutes? (2 marks)