ECON 356

In Class Exercise Two

1.  The Big Flowers Seed Company charges $2/lb. for the first 10 lb you buy of marigold seeds each week and $1/lb. for every pound you buy thereafter.  If your income is $100 per week, draw your budget constraint for the composite good and marigold seeds.

2.  Bo's budget per week is $200.  He buys either food or everything else.

    a.  If the price of food is $4 per unit and the price of everything else is $1 per unit - draw Bo's budget constraint -- show numbers on axes.

    b.  If the price of food increased to $8 per unit -- show this change on your budget constraint above.

    c.  Assuming we are back to $4 per unit of food, and Bo's Aunt Millie decided to give Bo a gift of $50 every week for being such a nice nephew -- how would this change Bo's budget constraint?  Show graphically and with numbers on your axes.

3.  Eve likes apples but doesn't care about pears.  If apples and pears are the only two goods available, draw her indifference curves.

4.  Koop likes food but dislikes cigarette smoke.  The more food he has, the more he would be willing to give up to achieve a given reduction in cigarette smoke.  If food and cigarette smoke are the only two goods (bads), draw Koop's indifference curves.

5.  Boris budgets $9/week for his morning coffee with milk.  He likes it only if it is prepared with 4 parts coffee, 1 part milk.  Coffee costs $1/oz, milk costs $0.05/oz.  How much coffee and how much milk will Boris buy per week?   Show graphically.

6.  How does your answer to #5 change if the price of coffee rises to $3.25/oz?  Show graphically.