A hypothetical consumer spends all their income on Ramen Noodles (N) and Wild Rice (W). N is the Quantity of Noodles; W is the Quantity of Wild Rice. Their income is $1,600 per month. The price of Noodles is $2 per package and the price of Wild Rice is $20 per pound. The Utility function is U=sqrt(N*W).

The MRS = - N/W.

The budget constraint equation is: 1,600 = 2*N + 20*W

Graph Qty of Noodles (N) on the vertical axis and Qty of Wild Rice (W) on the horizontal axis.

a. Graph the budget constraint. Label all points. What is the slope of the budget constraint?

b. Find the optimal quantities of Noodles (number of packages) and the Wild Rice (number of pounds) given the budget constraint. Graph these optimal quantities. Draw your indifference curve on the same graph. Label all points.

c. Show on your graph what happens when the price of Wild Rice increases to $40 per pound. Find your new optimal quantities of Noodles and Wild Rice. Label all points on the graph. Label the substitution effect and income effect.

Answer rating: 100% (QA)

a Graphing the budget constraint The budget constraint equation is 1600 2N 20W To graph the budget constraint we can rewrite it as an equation for W W ... View the full answer