Page

Page Econ 1110 Wissink Handwritten Problem Set 2 1. Manisha cares about and consumes only cookies and muffins. Manisha's preferences over bundles of muffins and cookies are very nicely behaved leading to her having a text-book typical indifference curve map. Manisha has $40 for buying muffins and cookies. The price of a cookie is $1 and the price of a muffin is $2. a) Draw Manisha's budget constraint. b) Adding three indifference curves, depict a feasible bundle that maximizes her utility. Briefly explain why she should choose a bundle on the budget constraint and not inside or outside it. Briefly explain why an optimal bundle cannot be on an indifference curve that intersects the budget constraint twice. c) Now, suppose the price of muffins falls to $1. Assume both cookies and muffins are normal goods for Manisha. Does she now consume more or less muffins? How about cookies? Draw a new budget constraint and describe the possible outcomes using the concepts of income and substitution effects. d) Sketch out how you would use your answers above to create her demand curve for muffins. 1 ZOOM