Question 1 (12 points) For each of the following assertions, please indicate whe

Question

Question 1 (12 points) For each of the following assertions, please indicate whether they are true or false. No credit will be given without an explanation as to why your claim is correct. a. (4 points) Stella spends all of her income on wine (W) and cigarettes (C). She chooses an optimal consumption bundle that consists of 15 bottles of wine and 10 cartons of cigarettes. The price of a bottle of wine is Pw 12. Stella's indifference curve through her optimal bundle is drawn below. Assertion: It is possible to determine Stella's income. Note: If true, determine Stella's income. And if false, ezplain why. Stella's Optimal Choice 10 15 20 25 30 Wine b. (4 points) As a graduation present, Jayden received a consumption bundle consisting of Arclight movie tickets and LA Rams football tickets. Given his current bundle, he is willing to exchange 5 movie tickets for 1 football ticket (and vice versa), maintaining the same level of satisfaction. Assume that movie ti are $16 each and football tickets are S70 each. tickets. Assertion: Jayden is currently holding too many football c. (4 points) A consumer spends all of her income on two goods. Assertion: If the two goods complements, then both goods must be normal goods.

Explanation / Answer

1. We know that, the income of the person is equal to or greater than the total amount spent by a person to buy the commodities. Now in the given case, we cannot determine the income of Stella. This is because we have been given the price of only Wine and not of Cigarette. One more thing that is to be noted that the indifference curve is given in the diagram and not the budget line. Had the budget line been given, we could have easily determined the income of Stella, without even knowing the price of Cigarette. We could have simply taken the bundle (20,0), and found that the income is 20(12) = 240. But since it's the indifference curve that is given here, income level cannot be determined.

2. MRS for movie tickets to football tickets is 5

The ratio of the prices is 70/16 = 4.375

Now in order for the bundle to be optimal, MRS = Px/Py

In this case, MRS is greater than Px/Py

Thus, we can say that Jayden is giving too much importance to the movie tickets, and hence the assertion that Jayden is holding too many football tickets is false. He should be holding more football tickets for the ticket prices to rise (Px) and MRS to fall until MRS = Px/Py

3. The assertion is true. This is because the definition of normal goods states that the demand of this good increases when a person's income increases. Now since the two goods are complementary goods, and since the entire income is being spent on both these goods, it is only possible for the budget line to be tangent to the "right-angled indifference curve" only when the indifference curve also moves to the right along with budget line(which also moves to the right as income increases). Had the indifference curve moved to the left(which is the case with inferior goods), the budget line would not have been tangent to it, as it always moves towards the right with increase in income.

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