Question

1) Alexandra Kollontai --a hypothetical person with extraordinary sensibilities--views one graphic novel to be a perfect substitute for two comic books. If a graphic novel costs $30, a comic book costs $10, and Alexandra allocates Y = $60 per year for graphic novels and comic books, what bundle does she buy? If the price of graphic novels falls to $20, how will Alexandra’s behavior change? Show the utility-maximizing bundles on diagrams with bud- get line and indifference curves (with comic books on the horizontal axis)

2) Suppose that you are asked to conduct a study to understand the behavior of students in college who are performing to some minimum acceptable standard. In this context, is util- ity maximizing behavior a good assumption? What would this assumption imply in the context of school performance? Can you think of another/good assumption that you can use to understand school performance behavior? Explain --If you cannot think of another assumption to be used to conduct such a study, explain why you cannot do so.

Answer 1

1. The consumer's marginal rate of substitution is 1/2. The consumer's budget equation is:

Where x is the quantity of comic books and y is the quantity of graphic novels. The consumer compares the price ratio with their marginal rate of substitution. The price ratio is 1/3 which is less than the marginal rate of substitution. Therefore, the consumer only consumes the cheaper of the two goods-comic books. The consumer's utility maximizing bundle is (6,0).
If the price of graphic novels decreases to $20, the consumer's new budget equation is:

Now, the price ratio is 1/2 which is equal to the consumer's marginal rate of substitution. Hence, the consumer is indifference between any bundle of the two goods that lies on the consumer's budget line.

Representing this on a graph:

The black line shows both the consumer's budget line and his indifference curve after the price change and the red line shows the consumer's original budget line.