Question

(a)

Suppose our consumer has two possible consumption bundles, one with 1 unit of

clothes and 5 units of food, the second with 3 units of clothes and 4 units of food. For

which is the MRS of clothes for food the highest?

(b)

For the example in (a), what property of indifference curves tells us which will have the

highest MRS of clothes for food?

(c)

Suppose your income is $100. The price of food is $15, and the price of clothes is $20.

Draw your budget constraint labeling the two endpoints.

(d)

Suppose that you income in question 3 rises to $150, draw your new budget constraint.

(e)

Draw the highest indifference curve obtainable in questions 3 and 4. What principle are

you illustrating?

Answer 1

a) The bundles of consumer are (1,5) and (3,4). So if clothes is on Y axis the first bundle would have higher MRS . The slope of indifference curve moves from high to low as we move from left to right.

b) The slope of indifference curve defines the MRS. Indifference curve is convex to origin due to the reason of diminishing marginal rate is substitution. The slopes of indifference curve moves from high to low as we move from left to right.

c)

The budget line equation is 15X+ 20Y= 100.

The maximum units consumed of food would be 100/20=Y =5 when no clothes are consumed

For clothes is 100/15= X= 6.6 or 6. (since discrete goods cannot be consumed in fraction)

d)

When income changes to$150.

The budget line equation is given.

For food 10 Units are consumed when income is$150

And clothes, 150/ 20= 7.5 or 7 since complete units are consumed.

e)

The highest attainable indifference curve bundles would be wren the tangency condition is being fulfilled. That implies that slope of indifference curve is same as of budget line .

This is shown in both the graphs at E.

(You can comment for doubts)