1. You receive from your parents 180 euros per month to cover living expenses. You spend the entire amount on pizzas (P) and phone calls (C). These two goods enter your utility function in the following way: U(P;C) = 3P 2C + 100, where P is number of pizzas consumed, and C is the number of hours of phone calls. The price of one pizza is 8 euros, whereas the price of one hour of phone calls is 2 euros.
a) How many pizzas and hours of phone calls will you optimally consume?
Now your parents no longer send you the 180-euro monthly check. Instead, they send you 20 coupons that you can trade for one pizza each, plus a 20-euro check per month. You can not use the coupons to pay your phone bill.
b) Has your optimal bundle changed? If so, what is your new optimal bundle? How do you know? Are you better o§ or worse o§ than before?
c) Redo part b) if what your parents send you is 5 coupons plus a 140-euro check per month.
2. Lou has preferences on wine and cheese, and his income is $5. In shop A, the price of wine is $0:50 per gallon, and the price of cheese is $0:50 per ounce. Facing those prices, his optimal bundle includes 4 ounces of cheese. In shop B, he has to pay an entry fee of $F and prices are $0:3 per gallon of wine and $0:4 per ounce of cheese. These two shops are his only feasible choices.
a) If F = 1:5, which shop will he choose to enter? Justify your answer graphically.
a) If F = 1:8, which shop will he choose to enter? Justify your answer graphically.
3. The only frozen yogurt shop in town is being closed down by city or- dinance. Before that, Jerry has one last chance to buy his favorite áavors: chocolate and raspberry. He surveys the prices o§ered at the shop and pur- chases his best a§ordable combination of the two áavors (you may assume he purchases strictly positive amounts of both áavors and that he has no money left after he leaves the shop). The shop doors close behind him for the last time as he heads home to store the yogurt in his freezer. On the way home, he runs into Newman who has secretly been hoarding pints of both types of yogurt. Newman makes Jerry the following o§er: he will buy from or sell to Jerry as many pints of the two áavors Jerry wishes to transact. The catch is that NewmanÃs price for raspberry yogurt is more than the price Jerry paid at the shop. The price of chocolate is the same. Will Jerry do business with Newman? Explain your answer.