Question

Questions 1. Homer Simpson gets a monthly salary of $90, which he spends on donuts and other goods. The donut store charges a price of $3 per donut. a. Homer always consumes donuts with other goods - 2 units of other goods with 1 donut. Show the indifference map of Homer and determine his best affordable bundle. Briefly explain your method. (5 points) b. The donut store changes its pricing policy. For the first 10 donuts, the price is still $3, but it is $2 per donut for purchases more than 10 donuts. Draw the budget line of Homer. Show the affordable set. Briefly explain your method. (5 points)

Answer 1

a)  

other goods 2 3. bonut

An indifference curve is a graph that shows a combination of two goods that give a consumer equal satisfaction and utility, thereby making the consumer indifferent.

Indifference curves operate under many assumptions, for example, each indifference curve is convex to the origin, and no two indifference curves ever intersect. Consumers are always assumed to be more satisfied when achieving bundles of goods on higher indifference curves.

If a consumer's income increases, the curve will move higher up on a graph because the consumer can now afford more of each type of good.

ULT - -- ift - Donat ILI Moves

An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a consumer’s preferences.

A budget line shows all possible combinations of two goods that a consumer can buy within the funds available to him at the given prices of the goods. All combinations that are within his reach lie on the budget line.