Question

1) When assembling a basket of two goods and the price of one good increases, this will cause:

		Indifference curves to shift downward
		Indifference Curves to shift upward
		Budget constraint line to rotate downward
		Budget constraint line to rotate upward

2) Fill in the following utility table for the consumption decision between Chicken Wings and Hot Dogs. Note that Chicken Wings cost $4 an order and Hot Dogs are $2.

Wings($4)	Utility(W)	MU(W)	MU/$(W)	Dogs($2)	Utility(D)	MU(D)	MU/$(D)
0	0	--	--	0	0	--	--
1	120			1	80
2	200			2	144
3	240			3	184
4	260			4	204
5	268			5	212

Given a budget of $20, you should buy _______ orders of wings and ______ hot dogs to optimize your utility.

Total utility from this bundle is ______.

3) If hot dogs in the previous example were $4, what would be the Marginal Utility per Dollar for each hot dog consumed?

Dogs($4)	MU/$
0	--
1
2
3
4
5

Under this new budget constraint, you should consume _____ orders of wings and _____ hot dogs.

Total utility from this bundle is _____.

4) At which quantities is the indifference curve between Chicken Wings and Hot Dogs a straight line with a constant slope?
(Hint: Where is MRS the same for multiple points in a row?)

		1
		2
		3
		4
		5

Answer 1

1. If the price of one good increases, the slope of the budget line that is given by the ratio of the price of the two goods increases. And the budget constraint rotates downward. Option c) is correct.
2. We complete the table as follows –

Wings($4)	Utility(W)	MU(W)	MU/$(W)	Dogs($2)	Utility(D)	MU(D)	MU/$(D)
0	0	--	--	0	0	--	--
1	120	120	30	1	80	80	40
2	200	80	20	2	144	64	32
3	240	40	10	3	184	40	20
4	260	20	5	4	204	20	10
5	268	8	2	5	212	8	4

Consumer would maximise utility where MU1/P1 = MU2/P2

This occurs when he buys 3 wings and 4 dogs.

Total utility from this bundle = 240 + 204 = 444

3. If price of dogs were 4 dollars, the tble would change to the following –

Dogs($2)	Utility(D)	MU(D)	MU/$(D)
0	0	--	--
1	80	80	20
2	144	64	16
3	184	40	10
4	204	20	5
5	212	8	2

In this new scenario, one should consume 3 wings and 3 hotdogs. Total utility = 184 + 200 = 384

4. MRS = MU(W)/MU(D). We calculate and get MRS as –

Wings($4)	MU(W)	Dogs($2)	MU(D)	MRS
0	--	0	--
1	120	1	80	1.5
2	80	2	64	1.25
3	40	3	40	1
4	20	4	20	1
5	8	5	8	1

So, MRS is same for quantities 3, 4 and 5.