Every day Fred buys wax lips and candy cigarettes. After deciding how many of each to buy, he multiplies the number of sets of wax lips times the number of packs of candy cigarettes. The higher this number comes out to be, the happier he is. For example, 3 sets of wax lips and 5 packs of candy cigarettes will make him happier than 2 sets of wax lips and 7 packs of candy cigarettes, because 3 × 5 is greater than 2 × 7. Wax lips sell for $2 a pair and candy cigarettes for $1 a pack. Fred has $20 to spend each day.
a. Make a table that looks like this:
Pairs of Wax Lips Packs of Candy Cigarettes
0
1
2
.
.
.
10
b. Draw a graph showing Fred's budget line and marking the baskets described by your table. Draw Fred's indifference curves through these baskets. If he must select among these baskets, which one will Fred choose?
c. Add to your table a third column labeled MV for the marginal value of wax lips in terms of candy cigarettes. Fill in the MV for each basket. (Hint: For each basket construct another basket that has one less pair of wax lips but enough more packs of candy cigarettes to be equally desirable. How many packs of candy cigarettes have been added to the basket?) For which basket is the marginal value closest to the relative price of wax lips? Is this consistent with your answer to part (b)?