ECN100 HW2 3
HW 1
(1) Draw an indifference curve map with the quantity of pennies are on the horizontal axis and the quantity of nickels are on the vertical axis. Given the shape of your indifference curve, how would you describe the typical relationship between these two “products”?
The two goods are perfect substitutes for each other. 5pennies are equivalent to a nickel.
(2) You and I are in consumer equilibrium. CDs cost 10 dollars each and cassette tapes only
2 dollars each. I consume CDs and cassettes. You consume only cassettes. What can you infer about my MRS (marginal rate of substitution) of CDs and tapes? What about your
MRS.
Since both individuals are in consumer equilibrium, for you, the MRS should equal the price ratio since you consume both goods. Hence MRS = 10/2 = 5.
For me since I consume only cassettes at my equilibrium, it implies that I consider CD’s a neutral good. Therefore my indifference curves are horizontal (assuming CD’s are on the horizontal axis). Hence MRS is zero, since no amount of increase in CD’s can change your utility unless you have more cassettes.
(3) The price of driving a car is 30 cents per mile. The cost of riding the bus is 60 cents per mile. At the moment, your Marginal Utility of the last mile of car transportation is 80 units, and the Marginal Utility of your last mile of bus transportation is 150 units. Are you maximizing your utility? Explain your answer.
If I’m maximizing my utility then the marginal utility derived from the last cent spent on each good must be equal.
The marginal utility from the last cent spent on driving a car is = 80/30 =8/3=2.67
The marginal utility from the last cent spent on riding the bus = 150/60 =5/2=2.5
Hence I’m not maximizing my utility. I can increase my utility by spending less on bus rides and more on driving the car.
(4) Let’s say your consumption basket is made up of two goods, “X” and “Y”. Your income is “I”. The market prices you face for these two goods are PX and PY.
Draw an initial
(1) Draw an indifference curve map with the quantity of pennies are on the horizontal axis and the quantity of nickels are on the vertical axis. Given the shape of your indifference curve, how would you describe the typical relationship between these two “products”?
The two goods are perfect substitutes for each other. 5pennies are equivalent to a nickel.
(2) You and I are in consumer equilibrium. CDs cost 10 dollars each and cassette tapes only
2 dollars each. I consume CDs and cassettes. You consume only cassettes. What can you infer about my MRS (marginal rate of substitution) of CDs and tapes? What about your
MRS.
Since both individuals are in consumer equilibrium, for you, the MRS should equal the price ratio since you consume both goods. Hence MRS = 10/2 = 5.
For me since I consume only cassettes at my equilibrium, it implies that I consider CD’s a neutral good. Therefore my indifference curves are horizontal (assuming CD’s are on the horizontal axis). Hence MRS is zero, since no amount of increase in CD’s can change your utility unless you have more cassettes.
(3) The price of driving a car is 30 cents per mile. The cost of riding the bus is 60 cents per mile. At the moment, your Marginal Utility of the last mile of car transportation is 80 units, and the Marginal Utility of your last mile of bus transportation is 150 units. Are you maximizing your utility? Explain your answer.
If I’m maximizing my utility then the marginal utility derived from the last cent spent on each good must be equal.
The marginal utility from the last cent spent on driving a car is = 80/30 =8/3=2.67
The marginal utility from the last cent spent on riding the bus = 150/60 =5/2=2.5
Hence I’m not maximizing my utility. I can increase my utility by spending less on bus rides and more on driving the car.
(4) Let’s say your consumption basket is made up of two goods, “X” and “Y”. Your income is “I”. The market prices you face for these two goods are PX and PY.
Draw an initial