Question

Consider Amy's preferences for chocolate and CD's. Using graph paper, plot Amy's "consumption bundles" as indicated in the following table. Plot quantity of chocolate on the vertical axis and quantity of CDs on the horizontal axis.

Bundle	Chocolate	CDs
a	9	0
b	7	2
c	6	2
d	5	3
e	4	4
f	4	3
g	3	4
h	2	6
i	0	6

Assume that Amy is indifferent between bundles c and i. She is also indifferent between bundles d, g, and h, but all three are preferred to c or i. Lastly, suppose that bundle e is Amy's favourite.

Part 1: Based on your graph and the data in the table above, how would Amy rank bundles e, f, and g (rank from highest preference to lowest preference)?

		e,g,f
		g,f,e
		f,e,g
		e,f,g

Assume Amy has a monthly allowance of 120 that she divides between purchases of chocolate and CDs. CDs cost 15 and chocolate costs 20. Using the table, compute the total expenditure for all the bundles. Answer the following:

Part 2: Given the budget constraint, how many of the bundles can Amy afford? (ie., answer 1 NOT one)

Part 3:  Can Amy afford bundle a? (Answer 1 or 2: yes=1; no=2)

Part 4: Can Amy afford bundle d? (Answer 1 or 2: yes=1; no=2)  

Part 5: Can Amy afford bundle g? (Answer 1 or 2: yes=1; no=2)  

Part 6: Can Amy afford bundle i? (Answer 1 or 2: yes=1; no=2)  

Calculate the intercepts for the budget line.

Part 7:   What is the value of the intercept on the vertical axis (chocolate)?  

Part 8: What is the value of the horizontal intercept (CDs)?  

Part 9: What is the slope of the budget line? (do not include a "-" sign)  

Part 10: Given Amy's budget constraint, which bundle would she choose if she were to maximize her utility?

		a
		b
		c
		d
		e
		f
		g
		h
		i

Answer 1

Sol:

Reason:

e is favourite of Amy ,so it will be preferred at most.First rank will be given to "e".

while comparing f & g , g will be preferred over f because "g" gives more satisfaction to Amy as compared to "f".As we can see in the diagram "g" lies on higher IC as compared to "f".

So,highest preference to "e", second rank to "g" and third rank to "f".

Part 2:

Part 3 to 7)

1. 

Part 8 & 9)

Part 10) Amy will choose bundle "g" to maximize utility because "g" is the only combination where her whole income will be spent.

Total expdt on "g" = monthly income = 120

We always assume that for utility maximization whole income must be spent.