ECON2233 Individual Homework 2

(Due on March 31 Friday, by 5pm)

10 points, equivalent to 5% of the units assessments

Show the derivation process that leads to the final solution for both questions.

1. Steves utility function is ( , ) = , where B and C denote burgers per week

and pack of cigarettes per week. Here, = and = . Steves income is
$120, the price of a burger is $2, and that of a pack of cigarettes is $1.

a) How many burgers and how many packs of cigarettes does Steve consume to
maximize his utility? Plot Steves indifference curve and budget constraint in a
diagram and identify the optimal bundle. Please show quantity of burgers on x-
axis and quantity of cigarettes on y-axis. (2 points)

b) When a new tax raises the price of a burger to $3, what is his new optimal bundle?
Illustrate your answer in the previous diagram. (1 point)

c) In the same diagram, decompose the overall effect into substitution effect and
income effect. Briefly explain these two effects. (2 points)

2. Suppose that left shoes and right shoes must be purchased separately. Ingrid needs
an equal number of each type of shoe (treats them as perfect complements) and
has a budget of $20 for shoes. Left shoes cost $2 each and right shoes cost $3 each.

a) How many of each will Ingrid buy at optimum? Plot Ingrids indifference
curve and budget constraint in a diagram and identify the optimal bundle. Let
x-axis represent the quantity of right shoes and y-axis represent the quantity of
left shoes. (2 points)

b) When the price of right shoes drops to $2, what is her new optimal bundle?
Illustrate it in the previous diagram. (1 point)

c) In the same diagram, decompose the overall effect into substitution effect and
income effect. Briefly explain these two effects. (2 points)

Please typewrite your answers. You should attempt to draw the graphs in MSWord or similar
word processing software. Label your graphs. If you absolutely cannot draw graphs in
software you can draw them by hand, ensure they are very clear, take a photo/scan and insert
them in your MSWord file. Writing all of the assignment by hand and scanning it in is not
appreciated you should at least type in your non-graph parts of the answers.
Save a copy of your assignment as a backup.
Convert your assignment into a pdf file and upload them in the Assessments > Assessment 2
(home work 2) > Homework submission link on LMS. You can submit only once, so go over
your work thoroughly before you pdf it and upload it.