Microeconomics

Name:__________________________________ Date:_________________________

Chapter 5.

1. Exercise 5
Consider your tastes for five dollar bills and ten dollar bills (and suppose that you could have
partial $10 and $5 bills). Suppose that all you care about is how much money you have, but you
don’t care whether a particular amount comes in more or fewer bills. (a) With the number of
five dollar bills on the horizontal axis and the number of ten dollar bills on the vertical, illustrate
three indifference curves from your indifference map.

(a) With the number of five dollar bills on the horizontal axis and the number of ten dollar bills
on the vertical, illustrate three indifference curves from your indifference map.
(b) What is your marginal rate of substitution of ten dollar bills for five dollar bills?
(c) What is the marginal rate of substitution of five dollar bills for ten dollar bills?
(d) Are averages strictly better than extremes? How does this relate to whether your tastes
exhibit diminishing marginal rates of substitution?
(e) Are these tastes homothetic? Are they quasilinear?
(f ) Are either of the goods on your axes “essential”?

2. Exercise 5.3
Beer comes in six and twelve-packs. In this exercise we will see how your model of tastes for beer
and other consumption might be affected by the units in which we measure beer. Suppose initially
that your favorite beer is only sold in six-packs.
(a) On a graph with beer on the horizontal axis and other consumption (in dollars) on the
vertical, depict three indifference curves that satisfy our usual five assumptions assuming
that the units in which beer is measured is six-packs.
(b) Now suppose the beer company eliminates six-packs and sells all its beer in twelve-packs
instead. What happens to the MRS at each bundle in your graph if 1 unit of beer now
represents a twelve-pack instead of a six-pack.
(c) In a second graph, illustrate one of the indifference curves you drew in part (a). Pick a
bundle on that indifference curve and then draw the indifference curve through that bundle
assuming we are measuring beer in twelve packs instead. Which indifference curve would
you rather be on?
(d) Does the fact that these indifference curves cross imply that tastes for beer change when
the beer company switches from 6-packs to 12-packs?
Name:_________________________________________ Date:_________________________
Chapter 6.

1. I have two 5-year old girls — Ellie and Jenny — at home. Suppose I begin the day by giving each
girl 10 toy cars and 10 princess toys. I then ask them to plot their indifference curves that
contain these endowment bundles on a graph with cars on the horizontal and princess toys on
the vertical axis. Ellie’s indifference curve appears to have a marginal rate of substitution of −1
at her endowment bundle, while Jenny’s appears to have a marginal rate of substitution of −2 at
the same bundle.
(a) Can you propose a trade that would make both girls better off?
(b) Suppose the girls cannot figure out a trade on their own. So I open a store where they can
buy and sell any toy for $1. Illustrate the budget constraint for each girl.
(c) Will either of the girl’s shop at my store? If so, what will they buy?
(d) Suppose I do not actually have any toys in my store and simply want my store to help the
girls make trades among themselves. Suppose I fix the price at which princess toys are
bought and sold to $1. Without being specific about what the price of toy cars would have
to be, illustrate, using final indifference curves for both girls on the same graph, a situation
where the prices in my store result in an efficient allocation of toys.

2. Suppose Coke and Pepsi are perfect substitutes for me, and right and left shoes are perfect
complements. Suppose my income allocated to Coke/Pepsi consumption is $100 per month, and
my income allocated to Right/Left shoe consumption is similarly $100 per month.

(a) Suppose Coke currently costs 50 cents per can and Pepsi costs 75 cents per can. Then the
price of Coke goes up to $1 per can. Illustrate my original and my new optimal bundle with
Coke on the horizontal and Pepsi on the vertical axis.
(b) (b) Suppose right and left shoes are sold separately. If right and left shoes are originally both
priced at $1, illustrate (on a graph with right shoes on the horizontal and left shoes on the
vertical) my original and my new optimal bundle when the price of left shoes increases to
$2.
(c) True or False: Perfect complements represent a unique special case of homothetic tastes in
the following sense: Whether income goes up or whether the price of one of the goods falls,
the optimal bundle will always lie on a the same ray emerging from the origin.