Question

Please Answer Question number two

A) (10 points) Draw the aggregate production possibility curve of fruit production in Washington State. Label carefully. Assume it is linear for each company. B) (5 points) Using one company as an example, explain what the slope of a producer's PPF means. C) (10 points) Suppose apples are $1 per pound and grapes are $5 per pound. Show how many grapes and apples each country will produce (a) graphically and (b) write your answer numerically. Explain how you found your answer. D) (10 points) Sketch the Washington State supply curve of grapes. What do you assume is fixed when you draw the supply curve? E) (10 points) Graphically, show how the supply curve changes when (a) the price of grapes per pound decreases and (b) the price of apples per pound decreases. Explain the intuition behind your answers (i.e. why your answers makes sense). F) (5 points) Explain why the PPF is bowed outwards Question 2 (50 points) Lulu has total income of 100 dollars and the two products are available in the market are apples and grapes. Suppose the price of apples are $1 per pound and grapes are $5 per pound. A) (10 points) Draw the budget constraint and two possible indifference curves for Lulu. Label your graph carefully B) (20 points) In your own words, describe what an indifference curve represents. What are three properties of indifference curves? For two of these properties, state the economic intuition behind the properties. C) (20 points) Suppose that Lulu actually hates apples and will only buy grapes. Draw two sample indifference curves given these preferences. Using these indifference curves and Lulu's budget constraint, what do you know about Lulu's optimal consumption bundle? Explain.

Answer 1

A. Let X denote the consumption of apples, and Y denote the consumption of grapes. The budget constraint is:

X5Y<100

The following image shows some possible indifference curves along with the budget line.

-60 -40- 20- 100 0 60 80 40 20

The purple line is the consumer's budget line and the curves are some possible indifference curves.

B. An indifference curve represents all possible combinations of two goods which can be consumed to provide the same level of satisfaction. Some properties of indifference curves are:

1. Indifference curves are convex to the origin: This is the case when the consumer likes both goods.

2. Indifference curves are downward sloping: To maintain the given level of satisfaction, more and more of one good will have to be given up to gain an additional unit of the other good. This is also known as the Marginal Rate of Substitution.

3. Two indifference curves can never intersect

C. If the consumer does not like a good, she will not consume it. In this case, the consumer's budget line is given by:

5Y 100

The indifference curves (points) will be points on the y axis as the consumer will never consume a positive amount of X.

60 40 20 0 60 40 20

The shaded region below the curve shows the consumer's budget set. The consumer will maximize her satisfaction by spending all her income on consumption of Y. At equilibrium, the consumer will consume 0 units of X and 20 units of Y.