Problem
1. Draw the indifference curves that you think illustrate the preferences described in the following statements.
i. "I care very little about food, but nice clothes are important."
ii. "Coke or Pepsi makes no difference to me."
iii. "I can't imagine eating pizza without beer."
iv. "It is important for local governments to have both good fire/police protection and a good school system."
2. Suppose the consumer's budget constraint is given by 10F + 5S = 100 where F is food and S is shelter. How much food can he buy if he purchases 2 units of shelter?
3. The price of a bottle of beer is $1 and the price of a pizza is $10. The MRS of bottles of beer for pizza expressed by Karl is 5. Has Karl chosen the optimal amount of beer? How do you know? If Karl is not maximizing, what should he do to improve his situation? (Hint: what is the MRS at the consumer optimum point?)