Question

Show all math work 1. Jerome has budgeted $10,000 this year for groceries and entertainment (nights out on a date.) After some consideration, Jerome provided the following information about various combinations of groceries (measured in bags) and entertainment (measured in nights out) per year to which he is indifferent: INDIFFERENCE CURVE #1: Total Utility =300 Utils Groceries 15 Entertainment Bundle 90 A 70 30 55 55 C 50 65 D 47 80 E INDIFFERENCE CURVE #2: Total Utility = 200 Utils Entertainment Bundle Groceries 92 F 10 75 20 60 35 53 48 65 45 INDIFFERENCE CURVE #3 : Total Utility 100 Utils Bundle Groceries Entertainment 5 75 15 55 30 40 60 25 21 80 On graph paper, draw all three indifference curves in the same with Entertainment measured on the vertical axis and Groceries measured on the horizontal axis. (Each block should measure 5 units.) Assume that to start, the price of a night out is $100 and the price of a bag of groceries is $100. Insert the starting budget constraint in your graph and determine Jerome's optimal bundle of groceries and entertainment. Mark this bundle clearly. graph, a. b. KLMNO ity Max.docx Page 2 of 3 At the optimal bundle selected in part b., what is the opportunity cost of a 0ag of groceries in terms of nights out as determined in the market place (that is, using relative price)? At the optimal bundle selected in part b., what is Jerome's Marginal Rate of Substitution of bags of groceries for nights out? d. Suppose that the price of a bag of groceries rises to $125 per bag. Insert the new budget constraint into your graph (the Jerome's new optimal bundle of groceries and entertainment. Mark this new bundle clearly. graph) and determine same At the NEW optimal bundle found in part e., what is the opportunity cost of a bag of groceries in terms of nights out as determined using relative prices? f. afford, when the Why doesn't Jerome choose Bundle N, which he can out and $125 for a bag of groceries? prices are $100 for a night At point N, what is true about Jerome's perceived opportunity cost of a bag of groceries in terms of nights out COMPARED TO the opportunity cost of groceries in terms of nights out in the marketplace? h. graph. Draw Jerome's demand curve for groceries in a new i.

Answer 1

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A) 100 B) 95 Budget Constraint: A 100G +100E 10000 black colour.) (Budget constraint is the line яс 75 C) Opportunity cost Pgrocery/Pentertainmant Opportunity Cost = 100/100 1 70 H d) At Optimal bundle the MRS must equal the slope of budget constraint. Slope of budget oconstraint is the price ratio. Therefore, MRS 1 55 INDIFFERENCE CURVE#1 50 45 Indifference Curve 2 40 Indifference Curve 3 25 N 20 15 10 20 25 30 80 85 0 5 10 15 35 40 45 50 55 60 65 70 75 90 95 100 GROCERY