1. In few weeks Professor Smith will be taking his daughter Attilla to State Fair. As Attilla often explains to her father, her happiness is all that matters, they have rather carefully explained her preferences. After much analysis they have decided that she cares only about two commodities: corny dogs and rides on midway. The table below explains many points of indifference (that is, she views each of the four combinations as equivalent).
Number of Rides
|
Number of Corn Dogs
|
MRS
|
1
|
10
|
|
2
|
6
|
|
3
|
3
|
|
4
|
2
|
|
a. Compute the Marginal Rate of Substitution (MRS)
b. If rides are four times as expensive as corn dogs, which of these four points must she choose (i.e., which combination of goods) is optimal. Describe your answer, stating explicitly what is being optimized and also what role the MRS plays in problem.
2. Demand for some product is evaluated to be
Q = 2000 +15 I - 5.5 P
Where I is income and P is price.
If I = 15000 and P = 150, compute point elasticity of price and of income.