NAME ______________________________________                            Economics 331;   Bob Horn

Budget Lines and Indifference Curves: Some exercises

1. William’s income is $3/day; apples cost $0.5/apple.

1. Draw William’s budget line, showing the choice between apples (x axis) and expenditure on all other goods (y axis)
2. In order to reduce medical costs, the government decides to subsidize apples; for every one William buys, he will be given $0.25 back. Draw William’s new budget line.
3. Instead of a subsidy, the government decides to use a voucher plan. The government provides William with $0.50/day, which only can be spent on apples; any part of it that he does not spend on apples must be returned. Draw his new budget line.

   2.   Suppose that a set of indifference curves was not negatively sloped.  What could you say about the         desirability of the two goods?

    3.  Jane, a former actress, spends all her income attending plays and movies, and likes plays exactly three times as much as she likes movies.

1. Draw her indifference map.
2. She earns $120/week. If plays cost $12 each and movies $4 each, show her budget line and highest attainable indifference curve. How many plays will she see?
3. If movie tickets go up to $5 each, how many plays will she attend?

     4.  A consumer purchases a luxury car rather than a compact car when the price of a compact  car is ¼ of the price of a luxury car. Suppose the price of a compact car falls by 50% and she continues to purchase a luxury car. In words or with indifference curves and budget lines, explain the consumer’s behavior.

    5.  Draw indifference curves to represent the following descriptions of consumer behavior:

1. I really can’t taste the difference between French Roast and Espresso Coffee, but I like them both.
2. I only like French Roast and never drink Espresso Coffee.
3. French Roast and Espresso Coffee are better mixed, although I don’t care too much about the proportions.

    6.  Phil consumes only hamburgers and cheap beer. The following market baskets are on his            indifference curve: A = (1,8), B = (2,4), C = (3,2), where (1,8) = 1 hamburger and 8 cans of  cheap beer.

1. Draw Phil’s indifference curve with hamburgers on the horizontal axis and cheap beer on the vertical axis.
2. What is the MRS between A and B? Between B and C? Does Phil’s indifference curve satisfy the assumption of diminishing MRS?