Question

40 38 36 34 32 30 28 26 84 22 16 ад 12 10 8 6 4 2 0 28 30 32 34 Pizza 18 20 0 2 4 6 10 12 14 16 22 24 26 2. a) Suppose Wolfie has an income of $24, that Ppizza = $2, and that Psoda budget constraint in the above figure. What is the opportunity cost of one more slice of pizza? = $2. Draw Wolfies b) At this income and prices, what is the optimal consumption bundle for Wolfie? c) Suppose the price of pizza falls to Ppizza = $1. Draw the new budget constraint. The fall in the price of pizza causes the quantity demanded of pizza to increase by how many units? d) (Fill in blanks) Go back to the case where Ppizza = $2, and that Psoda = $2 and where Wolfie has an income of $24. Now suppose that income doubles to $48. Draw in the new budget constraint and determine the new optimal consumption bundle. By comparing consumption when income is $24, to consumption when income is $48, we can see that pizza is a (normal/inferior and soda is a (normal/inferior) -good good e) Wolfie's preferences are an example of the case of perfect substitutes. Is this statement True or False?

Answer 1

2a. Opportunity cost of one slice of pizza= Price of pizza/Price of soda= 2/2= 1

b. Budget constraint=BL1= 24= 2*Ppizza+2*Psoda

Slope of budget line= -1

Optimal point is where Budget line is tangent to the indifference curve .

when Pizza= 8 and Soda=4.

c. New budget constraint=BL2= 24= Ppizza+ 2*P soda

Slope of budget line= -1/2

Optimal bundle pizza= 12, soda=6

Rise in quantity demanded of pizza= 12-8=4

d. New budget constraint=BL3= 48=2*Ppizza+2*Psoda

New optimal consumption bundle

Pizza= 16, soda=8.

Pizza is a normal good and soda is also a normal good.

As the consumption of both goods increased when income increased.

e. NO, Wolfie's preferences are not an example pf perfect substitutes. They are an example of perfect complement goods. Since 1 soda is consumed with every 2 pizza.

BL BL2 BL3 8 10 12 14 16 18 20 22 24 26 28 30 32 34 Pizza 0 2 4 6

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