1. What is the difference between ordinal utility and cardinal utility? Explain why the assumption of cardinal utility is not needed in order to rank consumer choices.

2. Draw a budget line and then draw an indifference curve to illustrate the satisfaction-maximizingchoice associated with two products. Use your graph to answer the following questions.

a) Suppose that one of the products is rationed. Explain why the consumer is likely to be worseoff.

b) Suppose that the price of one of the products is fixed at a level below the current price. Asa result, the consumer is not able to purchase as much as she would like. Can you tell if theconsumer is better off or worse off?

3. Connie has a monthly income of $200 that she allocates among two goods: meat and potatoes.

a) Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget

constraint.

b) Suppose also that her utility function is given by the equation U(M, P) = 2M + P. What

combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat

and potatoes are perfect substitutes.)

c) Connie's supermarket has a special promotion. If she buys 20 pounds of potatoes (at$2 per pound), she gets the next 10 pounds for free. This offer applies only to the first

20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus

potatoes) are still $2 per pound. Draw her budget constraint.

d) An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket

ends its promotion. What does her budget constraint look like now? What combination

of meat and potatoes maximizes her utility?