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QUESTIONS FOR REVIEW

1. A consumer has income of \$3,000. Wine costs \$3 a glass, and cheese costs \$6 a pound. Draw the consumer’s budget constraint What is the slope of this budget constraint?

2. Draw a consumer’s indifference curves for wine and cheese. Describe and explain four properties of these indifference curves.

3. Pick a point on an indifference curve for wine and cheese and show the marginal rate of substitution What does the marginal rate of substitution tell us  .

4.Show a consumer’s budget constraint and indifference curves for wine and cheese. Show the optimal consumption choice. If the price of wine is \$3 a glass and the price of cheese is So a pound, what IS the marginal rate of substitution at this optimum S.

5. A person who consumes wine and cheese gets a raise, so his income increases from \$3,000 to \$4,000 Show what happens if both wine and cheese are normal goods. Now show what happens if cheese is an inferior good.

6. The price of cheese rises from \$6 to \$10 a pound, while the  of wine remains \$3 a glass. For a consumer with a constant income of \$3,000, show what happens to consumption of wine and cheese Decompose the change Into income and substitution effects.

7. Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain

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