Question

1/ Paula, a former actress, spends all her income attending plays and movies and likes plays exactly three times as much as she likes movies. (Plays and movies are one for three substitutes) (40 points)

Draw her indifference map.

Paula has $120/wk budget for entertainment (watching plays and movies). If play tickets cost $12 each and movie tickets cost $5 each, show her budget line and highest attainable curve. How many plays and how many movies will she see?

2/ Picabo is an aggressive skier that she wears out two pairs of skis for every pair of bindings she wears out (perfect complements). Skis are $480/per and bindings are $240/per. If her budget is $3600, draw her budget line, draw her indifference curves and calculate the optimal consumption of Skis and Bindings. (40 points)

Answer #1

1) Paula spends all her income attending plays P and movies M. With the information, Marginal utility of plays = 3 x marginal utility of movies or MUP = 3 x MUM . Then MRS is a constant value at MRS between plays and movies = -3. Here indiffrence curves are straight lines downward sloping with a slope value of -3. The income is $120/wk and play tickets cost $12 each and movie tickets cost $5 each. She will compare MUP/MUM with Price ratio PP/PM which is currently 12/5.

Since |MUP/MUM| = 3 and |price ratio| is 12/5, we see that MUP/MUM > PP/PM. Hence she gets more satisfaction from plays and she spends entire income of $120 on plays and no movies

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