1. Assume a person has $8.00 to spend only on apples and bananas. Apples cost $.40 each, and bananas cost $.10 each.
a) lf this person purchases only apples, how many can be bought?
b) If this person purchases only bananas, how many can be bought?
c) If the person were to purchase 10 apples, how many bananas could be bought with funds left over?
d) If person consumes one less apple (that is, nine), how many more bananas could be bought? ls this rate of trade-off the same no matter how many apples are relinquished?
e) Write down algebraic equation for this person's budget constraint, and graph it showing points mentioned in parts a through d (using graph paper might improve the accuracy of your work).
2. Assume person faced with budget constraint described in problem 1 has preferences for apples (A) and bananas (B) given by
Utility =√A.B
a) If A = 5 and B = 80, what will utility be?
b) If A = 10, what value for B will give same utility as in part a?
c) If A = 2.0, what value for B will give the same utility as in parts a and b? -
d) Graph the indifference curve implied by parts a through c.
e) Given budget constraint from problem 1 which of points identified in parts a through c can be bought by this person?
f) Illustrate through some examples that every other way of assigning income provides less utility than does point identified in part b. Graph this utility-maximizing situation.