1. Consumer Choice Problem
>>The Davis Farmer's Market sells corn for $1 an ear. At this price, Gunrock buys 6 ears each Wednesday. What would happen to Gunrock's consumption of corn if the market offered corn at $1 an ear for the first 6 ears, but 50 cents an ear for each additional ear? Use a diagram containing indifference curves and budget constraints to demonstrate your answer. HINT:
Assume normal indifference curves and that the (initial) tangency condition is satisfied when Gunrock buys 6 ears of corn.
2. Problem about Price and Income Changes >>The only goods that Angela consumes are wine (X) and chocolate (Y). On Tuesday the price of wine goes up, though at the same time, Angela's income increases by just enough so that she is equally as happy (in utility terms) as she was on Monday.
A. What happens to the quantity of wine that Angela consumes between Monday and Tuesday? Use a diagram containing features of the consumer choice problem.
B. On Tuesday, would Angela still be able to afford the same basket that she purchased on Monday? How do you know?
On Wednesday there are no new price changes (so the Tuesday prices are still in effect), but Angela's income changes to the point where she can just exactly afford Monday's basket.
C. Is Angela happier (in utility terms) on Wednesday or on Monday? Explain why.