Question 1

August 15, 2020 12:26 PM

• Let C denote candy and B denote comic books.

• We know that and that
• We also know that = 0.5 (Price of Candy is 50 cents)

Two equations and two In part (e), the budget line shifts out to the red line. Intercepts given by
unknowns. Use the equations 24 and 48. The two lines are parallel.
to solve.

Sub the value of back into

either equation to solve for

We show here what happens to the original budget line in part (c). It pivots in
In part (e), the budget line shifts out to the red line. Intercepts given by and is now given by the red line, which has a vertical intercept of 6.
48 and 24. The two lines are parallel.

Chapter 2 Page 1
Question 2
August 15, 2020 12:30 PM

• Let denote garbage

• He gets $2 per
• Let denote cassettes
• Let be the price per cassette

If he accepts 0 sacks of , he has no income.

He can therefore buy zero cassettes. The budget set shifts out now.
It has horizontal intercept 4.
It maintains a slope of 3.
If he accepts 15 sacks of , he The budget set remains the area to the left
Here, we use the fact that he gets $2 per sack to determine of the budget line (including the line).
his income of $30. If each video cassette costs , he can afford
at most 30/6=5 cassettes.

The budget set is the area to the left

of the budget line (including the line).

Chapter 2 Page 2
Question 1
August 15, 2020 12:30 PM

We know that the bundles that Charles considers exactly as good as (5,20) Here are the solutions to (ii) and (iii). Please work out the others and let me know if you
all lie on the curve given by . So, let's try a few different values for have any problems.
and use this equation to get back the value of - (ii) The bundle (10,15) is shown in blue on the diagram. This lies in the area that
- contains the bundles that Charles weakly prefers to (5,20). Remember, this area
includes the indifference curve. All bundles on the curve are equally as good as
-
(5,20). All bundles above the curve are strictly preferred to (5,20). Since (10,15) is
-
above the curve, it is strictly preferred to (5,20). This statement is true.
-
- - (iii) The points (5,20) and (10,10) lie on the same indifference curve. By definition
then, (5,20) ~ (10,10) and Charles is indifferent between the two bundles, meaning
they are equally as good. The statement says that (5,20) is weakly preferred to
(10,10). This means that it is either the case that (5,20) is equally as good as (10,10)
or that (5,20) is strictly preferred to (10,10). Because it is equally as good, this
statement is true.

Here, using the above, we sketch the curve given by

This is the indifference curve that passes through Yes, see lecture notes.

(5,20).

You can draw the indifference curve that passes through the point Yes, see lecture notes.
(10,15) using the same steps as above for the equation

We only shade the set of bundles that Charles weakly prefers to (5,20). Please do (10,15) on your own.
Recall from the lecture notes: The set of bundles that he weakly prefers to (5,20) are all bundles that lie
either on the indifference curve or in the area up and right of the curve. He is indifferent between
(5,20) and those on the curve and he strictly prefers to (5,20) those above and to the right of the curve.
The shaded red area is therefore the set of bundles he weakly prefers to (5,20). Important: this area
includes the curve itself.

Chapter 3 Page 3
Question 2
August 15, 2020 12:31 PM
Jenn's indifference curve for all bundles
Shirley has perfect substitute preferences, as she only cares about the that give 32 total ounces of beer. (Remember: she consumes only 8 ounces from each
total amount of beer, not how the total is comprised. Her indifference curves 16 ounce can.)
are therefore straight lines. We can see three examples of such curves in the diagram.
These curves must have a slope of -2. This slope reflects that fact that two 8-ounce cans are just as
good as one 16-ounce can, so she can achieve the same level of happiness with either. Both options
result in 16 total ounces of beer. Likewise, 1 8-ounce can and 0.5 16-ounce cans also result in 16 total
ounces of beer.

Shirley's indifference curve for all bundles

that give 64 total ounces of beer.

Shirley's indifference curve for all bundles

that give 16 total ounces of beer.
Shirley's indifference curve for all bundles
that give 32 total ounces of beer.

Jen also has perfect substitute preferences but she makes a different trade off between
the two types of beer can. Because Jenn only drinks 8-ounces from either type of can, the two
cans are equally as good to her. That is, she has no reason to value a 16-ounce can more than an
8-ounce can because she'll only consume 8-ounces from both cans. So she is willing to trade off the two
cans in a one-for-one fashion (instead of two-for-one, like Shirley). Jenn's indifference curves, drawn in Jenn's indifference curve for all bundles
blue in the diagram, therefore have a slope of -1. Jenn's curves are flatter than Shirley's. that give 16 total ounces of beer. (Remember: she consumes only 8 ounces from each
16 ounce can.)

Chapter 3 Page 4
Question 3
August 15, 2020 12:31 PM

Let L denote loonies and Q denote quarters. We need exactly 2 L and 1 Q for one can of Coke. So,
- 2 L and 1 Q gives one can of Coke
- 4 L and 2 Q gives two cans of Coke
- 3 L and 2 Q still gives only one can of Coke
- 3 L and 5 Q still gives only one can of Coke.

When Elmo has 2 L and 1 Q, he can buy exactly one can of coke. At the point (2,1) on the graph,
increasing quarters without changing loonies, does nothing. Neither does increasing loonies without
changing quarters. This is because the machine must take exactly 2 L and 1 Q for every can of coke, so
buying another can of coke after the first requires increasing both coins.

But increasing both coins is not sufficient in this case. Here, they must increase in exactly a 2:1
proportion; that is, we must have 2 L for every one Q. So, if we start from the (2,1) point and increase L
to 3 and Q to 2, we arrive at the point (3,2), which is shown in yellow on the graph. We still have the
original 2 L and 1 Q, and now we have an additional 1 L and 1 Q. But the additional money does not
come in the exact ratio (or proportion) that the machine requires, so we can still only by 1 can of coke.
Therefore, Elmo is no better off at (3,2) than he is at (2,1), so he is indifferent between the two bundles.

We can apply exactly the same logic between the bundle (2,1) and any other bundle of coins in the
region that is shaded in blue. This region includes the blue L-shaped line and stops just short of the red
L-shaped line. (That is, it does NOT include the red line.) We therefore have a thicker, indifference band,
rather than a line or indifference curve.

Elmo only becomes better off once we reach the point (4,2), where he can now buy an additional can of
coke. The red area therefore shows another indifference band. This logic would continue all the way up
the graph, starting with the point (6,3) and the green line.

Chapter 3 Page 5