Suppose David buys cheese (X) and fruit (Y) with his income of $48 per week. Suppose the price of cheese has recently risen from $4 to $6 per pounds, while the price of fruit has fallen from $8 to $6 per pound. Before the price changes, David had been buying 4 lb. of cheese and 4 lb. of fruit each week. Since the price changes, he has been buying 2 lb. of cheese and 6 lb. of fruit weekly. Assuming David’s preferences have not changed, is it possible to say whether the price changes have made him better off or worse off? Use an indifference curve-budget line analysis to explain your answer.
Over lunch the person managing your firm’s fixed-rate bond portfolio mentions that they are not worried about what the Fed does with rates because of a swap trade they executed that morning. Briefly describe the risk they faced before the swap trade, the swap they entered into, and why the swap makes them indifferent to the action of the Fed.