Suppose that tea and sugar are perfect complements and that a consumer will only consume 1 cup of tea with 2 cubes of sugar. The price of tea is $1/cup. (You can assume that tea and sugar are perfec

The price of tea is $1/cup. (You can assume that tea and sugar are perfectly divisible goods). The price of sugar is $0.05 per cube. A consumer has set aside $66 per month to spend on tea that is sweetened to perfection. Graphically depict the consumer’s set of feasible consumption, the budget line, and 2 indifference curves, including the utility-maximizing indifference curve, indicating both graphically and numerically the optimal consumption of tea and sugar and the horizontal and vertical intercepts of the budget line. 2. Suppose y is a numeraire good, “money”, and one” bad”, smoke pollution. Graphically depict a situation by means of two indifference curves labeled I1 and I2, where I1 indicates less utility than I2 and where each incremental unit of pollution to which the individual is exposed has an increasingly harmful effect because the individual has an underlying respiratory illness. 3. Suppose that an individual’s preferences for two goods, x and y, have the properties of transitivity and non-satiation. Show that if two indifference curves of this individual are incorrectly drawn so that they intersect, this results in a logical contradiction. Use a diagram in commodity space and write a series of statements (claims) and justifications for each statement in demonstrating the contradiction that results. 4. a) If x is potatoes and y is meat, draw two indifference curves for a vegetarian, labelling these I1 for the less preferred combinations of goods x and y and I2 for the more preferred combination. 5. Assume that an individual’s income is y0 where y is a numeraire good. In a carefully labelled diagram, depict the substitution effect and income effect for good x where Px = y0/2×0 initially and the individual’s initial utility is I1 and Px then increases to y0/x0, causing the individual’s subsequent utility to fall to I0. Assume that good x is an inferior non- Giffen good. 6. a) Suppose x and y are perfect substitutes whose marginal rate of substitution is 2y/1x. In a diagram where an individual’s income is 10 units of y and the price of x is 1y/1x, depict numerically and graphically the optimal (utility-maximizing) combination (x, y). b) If the price of x now increases to 5y1x, in a separate diagram, depict numerically and graphically the utility-maximizing combination (x,y). 7. Suppose that the Winnipeg Jets have reached the Stanley Cup final game and you have as much as $1,000 to spend on tickets for the game. As a season ticket holder, you are allowed to and will definitely buy only 2 tickets for $100 each from the owners of the Winnipeg Jets, True North Entertainment. Unfortunately, you would really like to buy 2 additional tickets but the limited number of online tickets that were set aside for fans who were not necessarily season ticket holders were quickly sold out. In desperation, you search on Kijiji, Craig’s List and eBay and discover that the lowest price at which ticket scalpers are offering to sell Stanley cup tickets is $200 per ticket. Assume that, coincidentally, the maximum that you are willing to pay just happens to be $200 per ticket. Draw a fully labelled diagram that depicts the following information: (a) your budget line, (b) your purchase of 2 tickets at the price charged to season ticket holders, (c) the maximum ticket price of $200 per ticket that you would be willing to pay for two additional tickets, and (d) how much money you would be left with after you have purchased your desired total of 4 tickets.

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