1. In a few weeks Professor Smith will be taking his daughter Attilla to the State Fair. Since, as Attilla often explains to her father, her happiness is all that matters, they have rather carefully described her preferences. After much analysis they have decided that she cares only about two commodities: corny dogs and rides on the midway. The table below describes several points of indifference (that is, she views each of the four combinations as equivalent).
|
Number of Rides
|
Number of Corn Dogs
|
MRS
|
|
1
|
10
|
|
|
2
|
6
|
|
|
3
|
3
|
|
|
4
|
2
|
|
a. Calculate the Marginal Rate of Substitution (MRS)
b. If rides are four times as expensive as corn dogs, which of these four points should she select (i.e., which combination of goods) is optimal. Explain your answer, stating explicitly what is being optimized and also what role the MRS plays in the problem.
2. The demand for some product is estimated to be Q = 2000 +15 I - 5.5 P Where I is income and P is price.
If I = 15000 and P = 150, calculate the point elasticity of price and of income.