Question

Brothers Victor and Logan each have $100 to spend on comic books (X) and all other goods (Y).
Comic books cost $5 each, and all other goods (AOG) have a composite price of $1 each. Assume that their
preferences are represented by convex indifference curves. Their grandfather wants to give each boy either
5 comic books or $25 for their birthday. For the analyses below, include a budget line, indifference curve,
and optimal choice for each option (comic books and cash gift) as well as the initial choice.
a. (10 pts) Assume that Victor has preferences such that he is indifferent between the two gifts. Using an
indifference curve and budget line analysis, show Victor’s optimal choice for each option (comic books
and cash gift) as well as the initial choice.
b. (10 pts) Assume that Logan has preferences such that he prefers the cash gift. Using a separate graph
from part (a), show Logan’s optimal choice for each option (comic books and cash gift) as well as the
initial choice.

Answer 1

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