Question

Answer the following set of questions based off information about Mabel’s choice usingthe table below.

Kitten	Grappling
Sweaters	Hooks
10	0
5	1
0	2

Suppose the price of a grappling hook P_G is $50. What is Mabel’s Income here? What is the price of a kitten sweater P_K?

Assuming Mabel purchases 1 grappling hook and 5 kitten sweaters, draw her budget constraint and indifference curve (assume grappling hooks and kitten sweaters are imperfect substitutes). Make sure to label the graph and all important points.

Suppose Grunkle (short for great uncle) Stan decides to give Mabel a grapplinghook before she makes her purchasing decisions, how does this influence her choice of bundles? Will she still consume 1 grappling hook and 5 sweaters? (It might be helpful to use a rough sketch.)

Answer 1

Answer:

Given the choice of Mabel follwoinf are her choice:

• 10*PK + 0*PG = I --------------- Eq 1
• 5*PK + 1*PG = I -----------------Eq 2
• 0*PK + 2*PG = I -----------------Eq 3

where, I stands for her income. Now given that the price of PG is $50 on subsitutiing the value we get eq 2 as:

5*PK + 1*50 = I

and Eq 3 as: 2*50 = I

Therefore, 5*PK + 50 = 2*50

5*PK + 50 = 100

5*PK = 50

PK = $10

The price of kitten sweaters are $10.