The graph shows two budget lines and six consumption points (A, B, C, D, E, and F) for Pepsi and Dr Pepper. Note that budget line 1 is before the increase in Fred's income, whereas budget line 2 is after the increase in Fred's income.   Assume that the consumer, Fred, attempts to maximize his utility and exhausts his budget on the two goods. If Fred's income increases, the movement from point A to point  E  is consistent with Pepsi being a normal good and Dr Pepper being an inferior good. If Fred's income increases, the movement from point A to point  B  is consistent with Dr Pepper being a normal good and Pepsi being an inferior good.

A consumer has a budget set aside for entertainment during the year, and they spend the budget on concerts and plays. The consumer has a strong preference for attending concerts over plays: the two activities are substitutes, but not very strong substitutes. Sketch the indifference curves for this consumer on a graph, with concert tickets on the vertical axis and play tickets on the horizontal axis. Briefly explain why the consumer might ultimately choose to purchase a large number of play tickets, even though they have a strong preference for concerts. Include a budget line on your graph to illustrate this case.

Ravi has £21 to spend on pastries and biscuits. If he spends all the money on pastries, he can afford 15 pastries. The slope of Ravi’s budget line (assuming his pastries consumption is measured on the horizontal axis and his biscuits consumption is measured on the vertical axis) is -3.5 (3.5 in absolute terms). Calculate the price of a pastry and the price of a biscuit. Write down Ravi’s budget equation and draw the corresponding budget line. Mark the consumption bundle mentioned above. In your graph, clearly label the axes, the budget line, and calculate the coordinates of the points of intersection of the budget line with each axis. Interpret each of those points. Discuss how Ravi’s budget set would change if his budget doubles. Show the relevant changes graphically. How could the price of a pastry increase so that Ravi could still afford to buy 15 pastries? Discuss how Ravi’s budget constraint would change if the government imposed a tax of £0.50 per pastry and £0.50 per biscuit.

Bob consumes food and housing. Suppose his marginal utility from an additional unit of food is 20 and his marginal utility from an additional unit of housing is 180. Furthermore, suppose the price of a unit of food is $1.00 and the price of a unit of housing is $2.00. Can Bob increase his utility without changing his total expenditures on food and housing? Holding expenditures constant, A. Bob can increase utility by spending more on food and less on housing. B. Bob can increase utility by spending more on food and the same amount on housing. C. Bob can increase utility by spending less on food and more on housing. D. Bob cannot increase his utility. E. Bob can increase utility by spending more on food and more on housing.