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Suppose Maura-a college student who consumes a lot of caffeine in order to stay up late and finish homework-views 1 can of Red Bull and 3 cans of Diet Coke as perfect substitutes.

(a) Draw Maura's indifference curves/map with cans of Red Bull on the horizontal axis and cans of Diet Coke on the vertical axis.

(b) Suppose the price of (one can of) Red Bull is PRB = $4 and the price of (one can of) Diet Coke is PDC = $1. Assume that Maura has $12 to spend on Red Bull and Diet Coke. On the same figure, draw the budget constraint (label it BC1). What quantities of Red Bull and Diet Coke will she choose to consume? At that consumption bundle, does the marginal rate of substitution equal the marginal rate of transformation? Explain why or why not.

(c) Suppose now that the price of Red Bull falls such that PRB = $3. Draw Maura's new budget constraint (label it BC2). Now what quantities of Red Bull and Diet Coke will Maura choose to consume?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91669386

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