Question

1. Suppose that the price of peanut butter is $2 per jar and the price of jam is $4 per jar, and that the person in question consumes only peanut butter. (Assume that the person views both peanut butter and jam as goods.) a. What can you say about the number of jars of peanut butter that this person is willing to give up to get one jar of jam (i.e., the MRS) relative to the price ratio (Pjam/Ppb)? b. Suppose that the person has an income of $80. Draw a graph that illus- trates the person's budget set, an indifference curve consistent with the above description, and his optimal consumption point. c. Is it necessary that this person's indifference curve have the same slope as his budget line at his optimal consumption point? d. Is it possible for this person to have well-behaved preferences? Explain your answer.

Answer 1

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Anis consider the given information Price of peanut butter, Ppb= $2 Price of Jam Pjan= $4 Individual only conkune peanut butter MRS will be MRS= Jam Peanut butter this will give how much peanut butter are is willing to forgone for one extra unit of Jam. St. MRs Pam Ppb Jam - 9 & Peanut berdser Jam Peanut butter jar of peanut butter He is willing to for one jar of give 2 Jam.

b Person's income, I = 80 So, budget constraint is given by Br. 2. Perisch better to Jam 80 Pronut butter + Jam sy So. 2x+4y=80 22y=40 10 © Tudisterne curve will be dolled out and opnum Comp ose will be at poiul 4. slope diferente curve and budget line neust be equal at the optimum consumpor bundle mes= Pro No, because he only consenacs gans of peanut butter so he is not indifferent on indifference Curve