Question

1. Mara thinks good x and good y are perfectly substitutable in a 7:19 ratio. The market prices are ?? = 4 and ?? = 3. Which of the following is true? A. Mara’s indifference curves are steeper than her budget line B. Mara’s indifference curves are flatter than her budget line C. Mara’s indifference curves have the same slope as her budget line D. Mara’s indifference curves are parallel to her kink line E. None of the above

2. Mick’s utility is ?(?, ?) = ? + √?. He tells you that (20,9)~(15, ?). What’s y?

Answer 1

Answer 1: Here it is the case of perfect substitutes. The MRS has been given as 7/19= 0.38 and price ratio is given as 4/3= 1.33

Now since the MRS is less than the price ratio, Mara's indifference curves will be flatter than her budget line. So the correct answer is option B.

Answer 2: U (x , y) = x + √y

Given (20,9)~(15,y). Consumer is indifferent between both the consumption bundles simply means that they provide the same utility and thus lie on the same indifference curve.

Now we first find the utility that is given by (20,9)

U (20,9)= 20+3= 23

Now (15,y) must also provide 23 utils of utility. In that case:

23= 15+√y

8=√y

y= 64

Answer: y=64