1. Homer Simpson gets a monthly salary of $90, which he spends on donuts and other...

1. Homer Simpson gets a monthly salary of $90, which he spends on donuts and other goods. The donut store charges a price of $3 per donut.

Homer always consumes donuts with other goods – 2 units of other goods with 1 donut. Show the indifference map of Homer and determine his best affordable bundle. Briefly explain your method. (5 points)
The donut store changes its pricing policy. For the first 10 donuts, the price is still $3, but it is $2 per donut for purchases more than 10 donuts. Draw the budget line of Homer. Show the affordable set. Briefly explain your method. (5 points)

Expert Solution

Rahul Sunny answered 3 months ago

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly drink one more. After drinking 10 beers, Homer is so drunk that he does not notice any additional bottle he drinks (that is, the benefit of an additional bottle of beer is zero). Drinking more than 17 beers is beyond the processing capability of Homer’s liver and any additional bottle makes him sick (beer is no longer a “good” for Homer). Homer’s preferences for...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly drink one more. After drinking 10 beers, Homer is so drunk that he does not notice any additional bottle he drinks (that is, the benefit of an additional bottle of beer is zero). Drinking more than 17 beers is beyond the processing capability of Homer’s liver and any additional bottle makes him sick (beer is no longer a “good” for Homer). Homer’s preferences for...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly drink one more. After drinking 10 beers, Homer is so drunk that he does not notice any additional bottle he drinks (that is, the benefit of an additional bottle of beer is zero). Drinking more than 17 beers is beyond the processing capability of Homer’s liver and any additional bottle makes him sick (beer is no longer a “good” for Homer). Homer’s preferences for...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly drink one more. After drinking 10 beers, Homer is so drunk that he does not notice any additional bottle he drinks (that is, the benefit of an additional bottle of beer is zero). Drinking more than 17 beers is beyond the processing capability of Homer’s liver and any additional bottle makes him sick (beer is no longer a “good” for Homer). Homer’s preferences for...

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1. Homer Simpson gets a monthly salary of $90, which he spends on donuts and other...

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Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly...

Homer consumes only donuts and beer. When he consumes less than 10 beers, Homer would gladly...

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