Exercise 1

Let a consumer with an income of 100 units consume food and telephone calls. In scenario A,
food costs one rupee a unit and telephone one rupee a call. Draw the budget line for the
consumer? In scenario B, if the telephone company is thinking of replacing it with a tariff of 50
rupees for 75 free calls, and 2 rupees for every extra call made, draw the new budget line. If the
consumer prefers to consume telephone calls and food only in the ratio 3:1, any extra unit of
food or telephone calls give him no satisfaction. Give your answers in decimal points up to 2
decimal units. If two points give the same level of satisfaction, mention the one that has a
minimum amount of both food and clothing.

1a. Compute the optimal food consumption in scenario A.

1b. Compute the optimal clothing consumption in scenario A.
1c. Compute the optimal food consumption in scenario B.
1d. Compute the optimal clothing consumption in scenario B.
1e. Write whether the following statement is true/false, “The consumer is better in scenario B.
Exercise 2

Let a consumer with an income of 100 units consume food and telephone calls. In scenario A,
food costs one rupee a unit and telephone one rupee a call. Draw the budget line for the
consumer? In scenario B, if the telephone company is thinking of replacing it with a tariff of 50
rupees for 75 free calls, and 2 rupees for every extra call made, draw the new budget line. If the
consumer prefers to consume telephone calls to food only in the ratio 1:3, any extra unit of food
or telephone calls give him no satisfaction. Give your answers in decimal points up to 2 decimal
units. If two points give the same level of satisfaction, mention the one that has a minimum
amount of both food and clothing.

1a. Compute the optimal food consumption in scenario A.

1b. Compute the optimal clothing consumption in scenario A.
1c. Compute the optimal food consumption in scenario B.
1d. Compute the optimal clothing consumption in scenario B.
1e. Write whether the following statement is true/false, “The consumer is better in scenario B”.
Exercise 3

Let a consumer with an income of 100 units consume food and telephone calls. In scenario A,
food costs one rupee a unit and telephone one rupee a call. Draw the budget line for the
consumer? In scenario B, if the telephone company is thinking of replacing it with a tariff of 50
rupees for 75 free calls, and 2 rupees for every extra call made, draw the new budget line. The
consumer considers food and telephone calls to be perfect substitutes and is willing to give up
50 units of food for 60 units of telephone calls.

1a. Compute the optimal food consumption in scenario A.

1b. Compute the optimal clothing consumption in scenario A.
1c. Compute the optimal food consumption in scenario B.
1d. Compute the optimal clothing consumption in scenario B.
1e. Write whether the following statement is true/false, “The consumer is better in scenario B”.