Question

Bob has $36 to spend on tacos and burritos which are both ordinary goods for Bob. Burritos cost $4 each and tacos cost $2 each. a. Draw Bob's budget line with tacos on the x-axis and burritos on the y-axis. b. Draw an indifference curve showing Bob's optimal consumption at 5 burritos and 8 tacos. c. What is the ratio of the Marginal Utility of Burritos to the Marginal Utility of Tacos at Bob's optimal consumption bundle? d. On the same chart draw a new budget line. Assume that the price of tacos has risen to $3. e. Draw a new indifference curve showing Bob's optimal consumption bundle. (There are many correct answers to this question – just be sure your two indifference curves (the one for part b and the one for part e) exhibit the properties of indifference curves.) f. Now what is ratio of the marginal utilities at Bob's optimal consumption bundle? g. With regard to burritos, which is stronger for Bob – the substitution effect or the income effect?

Answer 1

Part a,b,c,d are answered.