Econ 110 Koker and Simons Name: ______________

Spring 2019 Section________________

Problem Set 2 (5 points)

Each question is worth 1 point (unless otherwise specified), with sub parts equally weighted,
unless indicated otherwise.

1. Ellen takes two classes this term: Economics and History. She finds that in the time it
takes her to read 10 pages in the Economics textbook she can read 30 pages in the
History textbook. She has just enough time to read 50 pages of Economics per week.
On a diagram, draw her "budget" constraint with History on the horizontal axis and
label both intercepts. Then answer the following question: If she needs to read 69
pages in her history book, how much economics can she still read?

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2. For each of the following sketch:
a. A typical person’s indifference curves between garbage and the composite
good.
b. Indifference curves for the same two commodities for Oscar The Grouch on
Sesame Street, who loves garbage and has no use for the composite good.

3. (2 points, 0.5 each) You have $21 to spend on beer and pizza. Beer costs $1 per bottle
and pizza costs $1.50 per slice. Each question makes a different assumption about
your preferences. (Assume that you are a rational individual.) For each question,
graph your budget constraint and indifference curves, with pizza on the horizontal
axis.

a. You always want to consume beer and pizza in a fixed proportion: you think that
each slice of pizza is only good if you have it with 2 bottles of beer. Any more of only
one of the two goods makes you neither better nor worse off. How much beer will
you drink?

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b. You realize that the nutritious value (in calories) of one bottle of beer is
equivalent to that of one slice of pizza. Since you only care about the calories you
consume (and more calories are better than fewer), you will consume how many
bottles of beer?

c. You are indifferent to alcohol (it is a neutral good for you). You only care about
pizza, and whether you consume more or less beer is all the same to you: all you
care about is pizza. How much beer will you consume?

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 d. The price of beer doubles. Assume your indifference curves are as in question
b. As a result of the increase in the beer price you are now worse off. How much
extra income would you need to be as well off as you were before the price
increase?

4. Mary has an entertainment budget of $600 a year to spend on movies (M) and
concerts (C). Concert tickets cost $15 each and movie tickets cost $10 each. Mary’s
utility function is given by U(C,M) = C3M.
a. Sketch Mary’s budget constraint with concerts on the horizontal axis
and indicate its slope and intercepts. What is the equation of the budget
constraint?

b. What combination of concerts and movies maximizes Mary’s utility?

Show your answer on your graph.