Question

11. Larry likes to go to his neighborhood coffee shop. He enjoys his coffee and his croissant in the morning.
    1. The price of latte is $2.50 a cup and the price of chocolate croissant is $3. His monthly budget for the morning snack is $100. Draw Larry’s (monthly) budget set. Assume that all the goods are divisible. Make sure that you label your graph clearly.
    2. Suppose that the price of latte increases to $3. What happens with Larry’s budget set? What happens with his budget line?
    3. Suppose that the price of latte is still $3, but the coffee shop owner introduces a frequent buyer program that reduces the price to $2.50 for every drink beyond the first 20 lattes. (In particular, the frequent buyer program kicks in only when Larry buys at least 20 lattes.) What is Larry’s new budget set?
    4. After some time, the coffee shop owner decides that the program is too difficult to operate and decides to replace it with a simpler one. He offers all his consumers a frequent buyer card that buys 1 drink free for each 10 paid lattes. What is Larry’s new budget set?

12. Consider the following relations. Which (if any) properties of preference relations are violated?
    1. Consumption bundle (x1,y1) is (weakly) better than (x2,y2) if x1  x2 .
    2. Consumption bundle (x1,y1) is (weakly) better than (x2,y2) if and only if x1  x2 and y1  y2 .
    3. Consumption bundle (x1,y1) is (weakly) better than (x2,y2) if and only if x1  x2 or y1  y2 .

Answer 1

1.