Ⓒ Cristina Reiser. All rights reserved. DO NOT SHARE OR DISTRIBUTE. 1. Consider preferences for cookies (on the x-axis) and ice cream bars (on the y-axis) for different people. Draw an

indifference curve map with 3 indifference curves on each (label them) for each scenario below. The consumer a. views 2 cookies and an ice cream bar as perfect substitutes b. always eats 2 cookies with one ice cream bar C. likes ice cream bars but doesn't care about cookies (is neutral) d. loves ice cream but hates cookies (hint: cookies are a "bad"). 2. Lavarre's utility function is U (x, y) = x-6y4, where x is the number of units of the x-good and y is the number of units of the y-good. The price of x is $4 and the price of y is $3. Lavarre has $30 to spend on these two goods. What is Lavarre's optimal bundle (use math and a graph to support your answer)? 3. Now, suppose you don't know the prices and income for Lavarre's scenario. Let px be the price of good x, py, be the price of good y, and m be income. a. Use the three steps from lecture to find the demand function for good x, x(px,py, m), and the demand function for good y, y(py,Px, m). You must show your work (e.g., how you derive the tangency condition from the given utility function). (hint: when you come up with your demand function you should be able to plug in the prices and income from (a) and get the same answer!) b. Given the demand functions you determined, calculate and interpret ax ax дрх дру END and ax am 4. Suppose that people derive utility from two goods - housing (H) and all other consumption (C) as measured in dollars. a. Putting housing on the x-axis, illustrate a person's optimal utility-maximizing bundle. As always, be sure to include axes, indifference curves, budget constraint, and labels. b. Now suppose the government agrees to subsidize consumers by paying 50% of their housing cost. How will their budget line change? Show this and the new utility- maximizing bundle. Explain the outcome using concepts from class. 5. There are millions of different scenarios we can apply to the consumer choice model (changing the goods, changing prices, incomes, preferences, etc.) It's actually fun thinking through different scenarios! Using question (4) as a framework, what is a different event (e.g., policy) that could change the optimal bundle of housing and other consumption goods? How would your event change the optimal bundle? Explain.