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Suppose there are only two goods in the economy: Yoyos and Marbles. Bob only cares about his consumption of Yoyos; the more Yoyos he has
Suppose there are only two goods in the economy: Yoyos and Marbles. Bob only cares about his consumption of Yoyos; the more Yoyos he has the happier he is, regardless of his consumption of Marbles. In contrast, Lucy only cares about his consumption of Marbles; the more Marbles she has the happier she is, regardless of her consumption of Yoyos. (a) Draw Bob's indifference curves, putting Yoyos in the scaxis and Marbles in the yaxis. (b) Draw Lucy's indifference Curves, putting Yoyos in the sicaxis and Marbles in the yaxis. (0) Do Bob's and Lucy's preferences comply with the preperty of diminishing marginal rate of substitution? (d) Are Bob's and Lucy's preferences transitive? Question 2 Matt considers Butter (B) and Sour Cream (8) as substitutes. His utility function has the form u(B,S) : B + S, where > 0. Suppose the price of Butter is PB : 3, the price of Sour Cream is PS : 2, and Matt has an income of M : 100 dollars to spend between Butter and Sour Cream. (a) In a well labelled diagram, draw Matt's indifference map, putting Butter in the maxis and Sour Cream in the y-axis. Make sure to indicate the direction at which the indiffference curves increase. (b) In a well labelled diagram, draw Matt's budget set indicating the intercepts with the axes and the slope of the budget line. (0) Obtain the Marginal Rate of Substitution between Butter and Sour Cream. What would happen to the MRS if Matt doubles his c0nsumption of Butter and Sour Cream? ((1) Obtain Matt's optimal bundle when: 73>3/2
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