Elmo finds himself at a Coke machine on a hot and dusty Sunday. The Coke machine requires exact change—two quarters and a dime. No other combination of coins will make anything come out of the machine. No stores are open; no one is in sight. Elmo is so thirsty that the only thing he cares about is how many soft drinks he will be able to buy with the change in his pocket; the more he can buy, the better. While Elmo searches his pockets, your task is to draw some indifference curves that describe Elmo’s preferences about what he finds.
a. If Elmo has 2 quarters and a dime in his pockets, he can buy 1 soft drink. How many soft drinks can he buy if he has 4 quarters and 2 dimes? How many can he buy if he has 8 quarters and 4 dimes?
b. Use red pens to shade in the “area” on the graph consisting of all combinations of quarters and dimes that Elmo thinks are just indifferent to having 2 quarters and 1 dime. Now use blue ink to shade in the “area” consisting of all combinations that Elmo thinks are just indifferent to having 4 quarters and 2 dimes. (Hint: Dimes and Quarters will be on the two axis)
c. What happens if the machine starts taking any combinations of quarters and dimes? So now Elmo can put in any combination of quarters and dimes, all he needs is to pay the total price of Coke. Explain how the Indifference Curves will look now? Draw a couple of them in a new graph.