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OME - HW2 - 381 - Arpit Jain

The document contains exercises related to indifference curves and budget constraints. It includes examples of individuals with different preferences for hamburgers and soft drinks and illustrates their corresponding indifference curves. It also provides a scenario about a person named Brenda who is choosing a car within her $25,000 budget based on the car's styling and gas mileage indexes. Several parts ask about the combinations of indexes Brenda could choose and which car she would select under different assumptions about her preferences. The document does not provide enough information to determine which month, July or January, would make Shai happier based on the prices of pomegranates and mangos and her budget in each month.

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1K views4 pages

OME - HW2 - 381 - Arpit Jain

The document contains exercises related to indifference curves and budget constraints. It includes examples of individuals with different preferences for hamburgers and soft drinks and illustrates their corresponding indifference curves. It also provides a scenario about a person named Brenda who is choosing a car within her $25,000 budget based on the car's styling and gas mileage indexes. Several parts ask about the combinations of indexes Brenda could choose and which car she would select under different assumptions about her preferences. The document does not provide enough information to determine which month, July or January, would make Shai happier based on the prices of pomegranates and mangos and her budget in each month.

Uploaded by

Arpit Jain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Organization and Market Economics Arpit Jain (PGP/24/381)

1: (Chapter 3, Page 131, Exercise 2) Draw indifference curves that represent the following
individuals’ preferences for hamburgers and soft drinks. Indicate the direction in which the
individuals’ satisfaction (or utility) is increasing
a. Joe has convex indifference curves and dislikes both hamburgers and soft drinks

Ans: Since he dislikes both food, his set of


indifference curve will be inward facing the
origin.

Her satisfaction(utility) increase towards origin.

b. Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down
the drain rather than drink it.

Ans: Since she dislikes both soft drink and dispose


it, it is neutral good for her.

Her satisfaction(utility) increases in upward


direction with more Hamburger.

c. Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be
polite.

Ans: Since he dislikes both soft, and drinks it only


to be polite, it is bad. He likes hamburger.

His satisfaction(utility) increases with more


hamburger and fewer soft drinks.
Organization and Market Economics Arpit Jain (PGP/24/381)

d. Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every
two hamburgers that she eats

Ans: Molly wants to consume goods in a fixed


proportion, so her indifference curves are L-
shaped.

Her satisfaction(utility) increases only when with


increase in both goods in fixed proportion.

e. Bill likes hamburgers, but neither likes nor


dislikes soft drinks

Ans:

Soft drink is Neutral good for Bill.

His satisfaction (utility depends entirely on quantity


of hamburger he has.

f. Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra
soft drink.

Ans:

Her indifference curves are straight lines with


slope ½.
Organization and Market Economics Arpit Jain (PGP/24/381)

2. (Chapter 3, page 132, Exercise 13) Brenda wants to buy a new car and has a budget of $25,000.
She has just found a magazine that assigns each car an index for styling and an index for gas mileage.
Each index runs from 1 to 10, with 10 representing either the most styling or the best gas mileage.
While looking at the list of cars, Brenda observes that on average, as the style index increases by one
unit, the price of the car increases by $5000. She also observes that as the gas-mileage index rises by
one unit, the price of the car increases by $2500.

a. Illustrate the various combinations of style (S) and gas mileage (G) that Brenda could select with
her $25,000 budget.

Ans: Price of Style PS= $5000,


Price of gas mileage PG= $5000

Budget= $25,000

PS X S + PG X G = 25000

5000S+2500G=25000

2S+G= 10

S= 5 – G/2 …..(1)

Slope of Budget line is -1/2

b. Suppose Brenda’s preferences are such that she always receives three times as much satisfaction
from an extra unit of styling as she does from gas mileage. What type of car will Brenda choose?

Ans: Brenda is willing to trade one unit of style for 3 units of gas mileage for equal satisfaction

i.e. (∆S/∆G)= -1/3

Since Budget line slope is -1/2.

She will prefer to choose styling. To get maximum satisfaction, G= 1 (min.Value)

Putting in (1)…, we get S= 4.5

The car that Brenda will choose S=4.5, G=1.

For max. satisfaction = 3x4.5 +1 = 14.5

c. Suppose that Brenda’s marginal rate of substitution (of gas mileage for styling) is equal to S/(4G).
What value of each index would she like to have in her car?

Ans: MRS= MUG / MUS = PG / PS

MRS= S/4G= 2500/5000

S= 2G
Organization and Market Economics Arpit Jain (PGP/24/381)

Putting in (1)

S =4, G=2, Hence Index of Gas mileage = 2, Index of Style= 4

d. Suppose that Brenda’s marginal rate of substitution (of gas mileage for styling) is equal to (3S)/G.
What value of each index would she like to have in her car?

Ans:

MRS= MUG / MUS = PG / PS

MRS= 3S/G= 2500/5000

6S= G

Putting in (1)

S = 5/4, G=15/2

S = 1.25, G=7.5, Hence Index of Gas mileage = 7.5, Index of Style= 1.25

3: Shai buys only pomegranates and mangos. In July, pomegranates sell for rupees 20 each and
mangos sell for rupees 10 each. In January, pomegranates sell for rupees 10 each and mangos sell
for rupees 20 each. Shai’s income is rupees 200, both in July and January. If Shai buys exactly eight
pomegranates in July, then she is________.

– Certainly happier in July

– Certainly happier in January

– Equally happy in July and January

– There is not enough information to answer this question

Ans: Let No. of Pomegranates be P, No of Mangoes be M

In July In January

PP = Rs 20, PM = Rs 10 PP = Rs 10, PM = Rs 20

20P+10M=200 10P+20M=200

2P+M=20 P+2M=20

Given 8 Pomegranates in July P=8 i, M will be 4, i.e. she buys 4 mangoes

We do not have value for MRS or her Utility/satisfaction and her purchase in Jan. We cannot know
which commodity brings her satisfaction.

There is not enough information given to answer this question.

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