Exercise 2 Juliette spends $48 each month on salt and vinegar chips (which cost $3 per bag) and Oreo cookies (which cost $2 per package). Her preferences for these two goods are represented by "convex" indifference curves. a) With chips on the horizontal axis, draw Juliette's budget line, making sure to indicate the horizontal and vertical intercepts. b) Suppose that at current prices, Juliette purchases 6 bags of chips each month (assume Juliette is maximizing her utility). Sketch an indifference curve tangent to Juliette's budget line consistent with this choice and her preferences. Label her chosen bundle with the letter A. How many packages of Oreos does Juliette buy? c) Suppose that the price of chips falls to $2 per bag, and Juliette increases her chip consumption to 8 bags each month. On the same graph, draw Juliette's new budget line and sketch an indifference curve consistent with her new choice and her preferences. Label her utility-maximizing bundle with the letter B. How many packages of Oreos does Juliette buy now? d) A major chip producer has experienced a fire, and the disruption of supply has caused the price of chips to increase to $4. As a result, Juliette cuts her consumption of chips to 5 bags per month. On the same graph, draw Juliette's new budget line and indicate her chosen bundle with an appropriately drawn indifference curve. Label her new utility-maximizing bundle with the letter C. How many packages of Oreos does Juliette buy now? e) On the same graph, draw Juliette's price-consumption curve. f) On a separate graph, draw Juliette's demand curve of chips using your answers from parts (b) (d). Explain how Juliette's chips consumption is affected by a change in price. IMPORTANT: For parts (a)-(d) be sure you use a graph panel with a consistent scale. As a reference, you can use the template shown in the last page of this problem set. I'll print copies of the template and leave them at my door box. Feel free to stop by and pick one!

Output (Concession Stand Items) Number of Workers Employed Per day Price of Labor Per Worker Per Day Total Variable Cost of Labor Total Fixed Costs Per Day Total Cost Per Day Average Price of Concession Stand Items Total Revenue Profit Average Variable Cost Average Fixed Cost Average Total Cost Marginal Cost Marginal Revenue 0 0 $120   $2,000   $8.00               100 2 $120   $2,000   $8.00               400 4 $120   $2,000   $8.00

See the cost information in the table below. When this firm produces 5 units, what is the average total cost? Quantity produced/day Total Cost Variable Cost 0 $100 0 1 $175 $75 2 $200 $100 3 $250 $150 4 $280 $180 5 $360 $260 6 $400 $300

Calculate and plot the following: No of units Total cost 0 2 1 9 2 12 3 15 4 20 5 30 6 42   Variable cost Fixed cost Average fixed cost Average variable cost Marginal cost