Uploaded by Hridey Gupta

Tutorial 2

Teaching Assistant:
Course Coordinator: A. Banerji
Problem 1: Indifference curves
Draw indifference curves to illustrate individual preferences for hamburgers
(y-axis) and soft drinks (x-axis) for following individuals:
a) Individual A dislikes both hamburgers and soft drinks
b) Individual B likes both hamburgers and soft drinks but insist consistently
to consume one soft drink for every two hamburgers that she eats
c) Individual C likes hamburgers, but neither likes nor dislikes soft drinks
Problem 2
Imagine this course has two midterms. The course grade is the higher of the
two scores that you get on the midterms.
a. You want to maximize your grade in this course. Let x1 be your score on the
first midterm and x2 be the score on the second midterm. Which
combination of scores would you prefer, x1 = 20 and x2 = 70 or x1 = 60 and x2
= 60?
b. Draw the 2 ICs on a graph? Are these preferences convex?
c. Imagine you are also taking another course. Instead of discarding the lower
grade, the grading policy now discards the higher one. How will the IC look
now? Are preferences convex now?
Problem 3: MRS
Suppose that Jones and Paul have each decided to allocate their income to
an entertainment budget in the form of hockey games or rock concerts.
They both like hockey games and rock concerts and will choose to
consume positive quantities of both goods. However, they differ
substantially in their preferences for these two forms of entertainment.
Jones prefers hockey games to rock concerts, while Paul prefers rock
concerts to hockey games.
a. How are the two sets of indifference curves different from each other?
(For consistency, plot hockey games on x-axis)
Problem 4
Emily consumes only nuts and berries. Fortunately, she likes both goods. The
consumption bundle where Emily consumes x1 units of nuts per week and x2
units of berries per week is written as (x1, x2).
• The set of consumption bundles (x1, x2) such that Emily is indifferent between
(x1, x2) and (1, 16) is the set of bundles such that x1 ≥ 0, x2 ≥ 0, and
x2 = 20 − 4√ x1
a. Can you plot the Indifference curves?
b. What is the Marginal Rate of Substitution? Is it increasing?