Lecture 2 Part 1.

The Theory of Consumer Choice.

Homework

1. Suppose a consumer has an income of $ 2000. He allocates his budget only to

cheese and meat.

a. Draw budget constraint of a consumer if the price of cheese is $ 5 per pound

and price of meat is $ 10 per kilogram. What is the slope of budget constraint
when to consider meat is on vertical axis while cheese on horizontal axis?
b. Draw an indifference curve for cheese and meat. Put the cheese on vertical
and meat on the horizontal axis. How the marginal rate of substitution has
changed?
c. Illustrate how this indifference curve follows the key properties of indifference
curves
2. Compare the following pairs of goods:
- burger and hotdog
- DVD and DVD player

a. Determine for which pair of goods indifference curve will be straight line and
when to expect very bowed indifference curve?
b. For which pair of goods it is reasonnable to expect a leftward shift in demand
curve of one good, when the price of another one changes

3. John and Lisa do some shopping. Lisa has got $ 300 and must decide how many skirts
and pants to buy. John with a budget of $150 must allocate his income to shirts and pants.
The price of one skirt is $ 50 and one pair of pants is $ 30 for Lisa. John buys one shirt at
price of $15 and one pair of pants for $25. Draw skirts and shirts on vertical axis and pants
on horizontal axis for Lisa and John respectively. Find out the slope of budget constraint for
Lisa and John.

4. John consumes only coffee and pasta. Consider that for John coffee is normal good, while
pasta is inferior. If the price of coffee falls, what happens with consumption of pasta? Can
both goods be inferior for John?