1. Abdul was an actor and spends all of his disposable income on attending either plays or movies. He likes plays exactly 3 times as much as he likes movies.
a. Draw Abdul's indifference map.
b. Suppose he has a disposable income of $120/month. If tickets cost $12 for plays and $3 for movies, show his budget line and indicate the highest attainable indifference curve. How many movies and how many plays will he see in a month?
c. Suppose play tickets remain at $12, but movie ticket prices rise to $5. Now what will be Abdul's monthly demand for movies and plays?
2. Militsa is indifferent between consuming four slices of pizza and one beer and three slices of pizza and two beers. She prefers a bundle containing three beers and one pizza slice to either of the two bundles mentioned earlier. Do Militsa's preferences show diminishing marginal rates of substitution? Explain.
3. A new telephone company, Rugers, has offered you two cell-phone calling options.
Plan A: Pay $0.05/call.
Plan B: Pay $2/week which includes 30 free calls per week. Any calls over 30 in a week are charged at $0.05/call.
Assume you have $12/week to spend on telephone calls and the composite good. Graph your budget constraint under the two plans. Make note of anything that seems strange.
4. Freya spends $6/week total on grape juice and kiwi juice. Grape juice costs $2/cup while kiwi juice costs $1/cup. Freya believes that 1 cup of grape juice is a perfect substitute for 3 cups of kiwi juice. Find her optimal consumption bundle of grape and kiwi juice each week. Now suppose that the price of kiwi juice rises to $2/cup. How much additional income would Freya need to consume her original bundle (the bundle BEFORE the price of kiwi juice changed)?
5. Suppose a demand curve can be represented by the function Q = 100-50P.
a. Draw the demand curve and indicate the portions that are elastic, inelastic, and unitary elastic.
b. Without performing extra calculations, state at what point on the demand curve is consumer expenditure maximized and explain the logic behind your answer.
6. Professors Adele and Buzowski make up the entire demand side of a market for research assistants. If Adele's demand curve is P=50-2qA and Buzowski's demand curve is P=50-qB, where qA and qB represent the hours demanded by Adele and Buzowski respectively, and P is $/hour, then what function describes market demand for research assistants?
7. Sketch the probably Engel curves for: food, Eurpoean vacations, and Cheapie sneakers and $6.99/pair.
8. Using a budget line and an indifference curve, show a consumer making an optimal choice of goods X and Y. Now, suppose the price of X increases. Can you draw well-functioning preferences (i.e., they follow our assumptions about preferences) such that X is a normal good and Y is a substitute for X?