Answer 1

1) M. Pm + P. Pp =I
• 20 M + 5 P = 1000
• M = 50 – ¼ P

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Answer 1 Answer 1

2) TU = ( M – 2 ) P •
• MUm = dTU/ dM = P • (1 ) can be rewritten as:
• P / 20 = (M – 2 ) / 5
• MUp = dTU/ dP = M - 2
• Or P =4M-8 (1)
• To maximize TU, 2 conditions must be • (2) Can be rewritten as: M = 50 – ¼ P
satisfied: (2)
• MUm / Pm = MUp / Pp (1)
• M. Pm + P. Pp = I (2)

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Answer 1 Answer 1
•
3) If Pp = 10: new budget equation:
• Substitute (2) into (1):
M = 50 – ½ P
• P = 4 (50 – ¼ P ) – 8 = 192 – P
To maximize TU, 2 conditions must be satisfied:
• ➨ P = 96
P / 20 = (M – 2 ) / 10 (1)
• M = 26
• TU max = ( M – 2 ) P = ( 26 – 2 ) . 96 = and M = 50 – ½ P (2)
2304 units of utility

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 Answer 1 Answer 2

(1) Can be rewritten as: P = 2 M – 4 (1)

Substitute (2) into (1):
➨ P = 48
M = 26
TU max = ( M – 2 ) P = ( 26 – 2 ) . 48 =
1152 units of utility

Answer 3 Answer 3

1) Perfect substitutes, MRS = 1

2) Perfect complements
vertical axis: MRS = ∞
horizontal axis: MRS = 0
3) Left gloves are measured on vertical axis and
Right gloves are measured on horizontal
axis:
horizontal lines, MRS = 0
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Answer 4 Answer 4

If: Clothing is measured on the vertical axis and

Food is on the horizontal axis
1) 20 C or 40 F
2) 40 C or 80 F
3) 40 C or 40 F
4) 20 C or 20 F

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 Answer 5
Answer 5

Perfect complements: 2) Clothing is measured on the vertical axis and

For any budget line, Food is on the horizontal axis:
the most preferred If MRS > Pf / Pc: consume only F
market basket must If MRS < Pf / Pc: consume only C
be at the kink point of If MRS = Pf / Pc: any market basket on the
the ICs budget line is equally good for the consumer.

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Answer 5 Answer 6

Clothing MUc MUc / Pc Food MUf MUf / Pf

1 60 6.00 1 115 5.75
2 55 5.50 2 105 5.25
3 51 5.10 3 98 4.90
4 48 4.80 4 94 4.70
5 47 4.70 5 92 4.60
6 46 4.60 6 90 4.50

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Answer 6 Answer 6

2) Yes, 1 (10) + 6 (20) = $ 130 = I, so the budget
constraint is satisfied with this market
basket. However, TU is not maximized since
( MUc / Pc ) = 6 > ( MUf / Pf ) = 4.5.The
consumer can increase TU by consuming
more Clothing.
3) TU max when MUc / Pc = MUf / Pf
At C = 5 and F = 4 ( MU / P = 4.70 ) and
at C = 6 and F = 5 ( MU / P = 4.60 ), but this
market basket is too expensive, i.e., 6 ( 10 ) +
5 ( 20 ) = $ 160

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 Answer 7 Answer 7

Sodas are measured on the vertical axis and

Tortilla chips are measured on the horizontal
axis.
The first budget line: 0.1 T + 0.3 S = 4.8 since 4.8
is the cost of 30 T and 6 S.
The second budget line is 0.25 T + 0.75 S = 11.25
since 11.25 is the cost of 36 T and 3 S.

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Answer 7 Answer 8

The price ratio ( Pt / Ps ) is 1/ 3 in both cases, so Clothing is measured on the vertical axis and
these lines are parallel. Food is on the horizontal axis.
Since he cannot afford to buy the first market The budget line is: 5 F + 10 C = 100
basket with the second budget line, no The ICs: C = 3, F = 2 or C = 6, F = 4 or C = 9, F = 6 .
inconsistency is revealed. He is clearly better ..
off in the first week.
Karen will reach the highest IC by buying only
food.

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Answer 8