Practice Problem Set 1

ECON 2300 H

(Not to be submitted for grades. It’s just practice.

Chapter 2
1. If Diane spent her entire allowance, she could afford 8 candy bars and 8 comic books
a week. She could also afford 10 candy bars and 4 comic books per week. The price of
a candy bar is 50 cents.

(a) What is the price of comic books?

(b) What is Diane’s weekly allowance?
(c) Draw Diane’s budget line by putting candy bars on the x-axis and comic books
on the y-axis.
(d) Now draw Diane’s budget line by putting comic books on the x-axis and candy
bars on the y-axis.
(e) Suppose Diane’s income doubles. Show what happens to the budget line in your
answer to part (c) and in your answer to part (d).
(f) Suppose the price of candy bars increases to 1 dollar. Show what happens to the
budget line in your answer to part (c) and in you answer to part (d).

2. Gary Cash consumes garbage and old 1970’s workout video cassettes. He keeps the
garbage in his backyard and only accepts the garbage because people pay him $2 per
sack for taking it. Gary can accept as much garbage as he likes at that price and he
has no other source of income because he spends his days watching his cassettes and
working out (at least he’s in good shape). These beloved cassettes cost him $6 each.

(a) If Gary accepts zero sacks of garbage, how many video cassettes can he buy?
(b) If he accepts 15 sacks of garbage, how many video cassettes can he buy?
(c) Write down an equation for Gary’s budget line.

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 (d) Draw Gary’s budget line and shade in his budget set. Put sacks of garbage on
the y-axis and cassettes on the x-axis.
(e) George, Gary’s next-door neighbour, can’t take the smell of so much garbage in
Gary’s backyard! George gives Gary $24 dollars of income to help, hoping Gary
will accept less garbage. Re-draw Gary’s budget line and budget set now that he
has an additional income of $24.

Chapter 3
1. Charles Barkley likes pizzas and burgers. The consumption bundle where Charles
consumes xp pizzas and xb burgers per night is written (xp , xb ). Last night, Charles
ate a whopping 5 pizzas and 20 burgers! He would have been just as happy eating
some different combinations of pizza and burgers. Actually, it happens that the set
of consumption bundles (xp , xb ) such that Charles is indifferent between (xp , xb ) and
(5, 20) is the set of all bundles given by xb = 100/xp . The the set of consumption
bundles (xp , xb ) such that Charles is indifferent between (xp , xb ) and (10, 15) is the set
of all bundles given by xb = 150/xp .

(a) On a graph with pizzas on the x-axis and burgers on the y-axis, plot several points
that lie on the indifference curve that passes through the point (5, 20), and sketch
this curve. Do the same for the indifference curve passing through (10, 15).
(b) In your graph, shade in the set of bundles that Charles weakly prefers to (10, 15).
Now shade in the set of bundles such that Charles weakly prefers (5, 20) to these
bundles.
(c) For each of the following statements about Charles’ preferences, write ’true’ or
’false’:
i. (30, 5) ∼ (10, 15).
ii. (10, 15)  (5, 20).
iii. (5, 20)  (10, 10).
iv. (4, 24)  (11, 9.1).
v. (14, 11)  (2, 49).
(d) Are Charles’ preferences convex?
(e) Are Charles’ preferences monotonic?

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 (f) Charles’ indifference curve through the point (10,10) is given by xb = 100/xp .
What is Charles’ marginal rate of substitution at the point (10,10)? [Hint: MRS
is a slope. Use calculus to take a derivative and then sub in the appropriate value.]

2. Shirley drinks beer in the evenings while watching ‘Dancing with the Stars.’ She’s super
excited for this season because she heard that U.S. Olympic Swimmer Ryan Lochte
is on the show! That guy is always entertaining (for better or for worse). Shirley is
practical: she doesn’t care about the size of the cans that the beer comes in, she only
cares about the total amount beer she actually has.

(a) On a graph with 16-ounce cans on the x-axis and 8-ounce cans on the y-axis, draw
some of Shirley’s indifference curves for 16- and 8-ounce cans of beer.
(b) Jenn, Shirley’s best friend, is more strict with her beer consumption. Jenn only
allows herself 8-ounces of beer at any one time and pours out the excess beer into
a sink. On the same graph, draw some of Jenn’s indifference curves for 16- and
8-ounce cans of beer.

3. Imagine a Coke machine requiring exact change – two loonies and one quarter – for
one can of Coke. No other combination of coins will make anything come out of the
machine. Elmo is super thirsty and only cares about buying as many cans as possible
with the change in his pocket.

(a) If Elmo has two loonies and one quarter, he can buy one can of Coke. How many
can he buy with four loonies and two quarters? What about 3 loonies and two
quarters? 3 loonies and five quarters?
(b) Draw a graph with the number loonies on the horizontal axis and quarters on the
vertical axis. Mark in the graph all combinations of loonies and quarters that
Elmo thinks are just indifferent to having 2 loonies and 1 quarter. Now mark
all combinations that Elmo thinks are just indifferent to having 4 loonies and 2
quarters. (You may want to use different colours for each. Hint: do you end up
with indifference curves or thicker indifference ‘bands’ ?)