A. Bob consumes two commodities: x and y (say, chocolate and classical
music). More y never hurts, but in order to enjoy y he has to consume at
least 4 units of it; put di¤erently, he starts to enjoy y after the fourth
...
A. Bob consumes two commodities: x and y (say, chocolate and classical
music). More y never hurts, but in order to enjoy y he has to consume at
least 4 units of it; put di¤erently, he starts to enjoy y after the fourth unit.
(In order to appreciate y he must …rst develop a taste for it.) Regardless
of the amount of y he consumes, Bob thinks that more x is always strictly
better than less. Moreover, he (strictly) prefers the bundle (x; y) over (x0; y0);
where both y and y0 are at least 4, if and only if x y > x0 y0.
1. Draw Bob’s indi¤erence curve(s) through the bundles: (2,6), and (6,2).
(On each indi¤erence curve indicate at least two bundles, one where
the amount of y is less than 4 and one when this amount exceeds 4.)
2. Bob has an income of $100. The price of x is $1, and the price of y is
py. For what values of py will Bob buy y, and for what values of py will
Bob buy only x?
B Alice consumes two commodities, x and y. The prices for x and y are
px = py = 1 (dollar per unit). Alice’s income is $100. Draw her budget set.
On her birthday, Alice received a present of 3 units of y. Draw Alice’s
new budget set for each of the following two cases:
(1) Alice is allowed to sell the present.
(2) Alice cannot sell the present.
C. Bob earns an income of 100 dollars and he consumes two goods, x and y.
The price of good x is 2 dollars per unit and that of good y is 4 dollars per
unit. Draw Bob’s budget set.
Assume, now, that for each unit of good x that Bob buys, he gets one
quarter of good y for free. Draw Bob’s new budget set in each of the following
two cases:
(1) Bob is not allowed to resell either good x or good y.
(2) Bob is allowed to resell (only) good y .
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