Question

We have already seen the min function, which returns the value of the lowest input, in class. Remember that there is also a max function that returns the value of the highest input (ex. max(2,5) = 5).

Dale divides her income between trips to two cities: (g) and (s) . Her utility function over these two activities is:

?(?, ?) = max(?, 2?)

a) In the graph area below, draw Dale’s indifference curve that passes through the point (3,2) with a solid line. Place (g) on the horizontal axis.

b) Suppose Dale’s income is $600, the price of a trip to (s) is $150 and the price of a trip to (g) is $100. Write an equation for her budget line and draw it as a dashed line in the graph area below.

c) Shade Dale’s affordable set. Are any bundles in this set also in the weakly preferred set?

d) Suppose Dale’s receives a quantity subsidy of $50 on trips to (s). Draw her new budget line as a dotted line.

e) Are this consumer’s preferences well-behaved? Explain, being sure to show which properties of well-behaved preferences do (or do not) hold.

Answer 1