Suppose Jane spends $48 each month on Oreo cookies with a price of $2 per package, and salt and vinegar chips with a price of $3 per bag. a) With chips on the horizontal axis, draw Jane budget constraint, making sure to indicate the horizontal and vertical intercepts. b) Suppose that at current prices, Jane purchases 6 bags of chips each month. Draw an indifference curve tangent to Jane budget constraint consistent with this choice (assume Jane is maximizing her utility). Label her chosen bundle with the letter A. How many packages of Oreos does Jane buy? c) Suppose that the price of chips falls to $2 per bag, and Jane increases her chip consumption to 8 bags each month. Draw Jane’s new budget constraint and indicate her chosen bundle with an appropriately drawn indifference curve. Label her utility-maximizing bundle with the letter B. (Be sure to determine the right quantities of both chips and Oreos!)
Suppose Jane spends $48 each month on Oreo cookies with a price of $2 per package,
and salt and vinegar chips with a price of $3 per bag.
a) With chips on the horizontal axis, draw Jane budget constraint, making sure to indicate the
horizontal and vertical intercepts.
b) Suppose that at current prices, Jane purchases 6 bags of chips each month. Draw an
indifference curve tangent to Jane budget constraint consistent with this choice (assume Jane is maximizing her utility). Label her chosen bundle with the letter A. How many
packages of Oreos does Jane buy?
c) Suppose that the price of chips falls to $2 per bag, and Jane increases her chip consumption
to 8 bags each month. Draw Jane’s new budget constraint and indicate her chosen bundle
with an appropriately drawn indifference curve. Label her utility-maximizing bundle with
the letter B. (Be sure to determine the right quantities of both chips and Oreos!)
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, Jane cuts her consumption of chips to 5 bags
per month. Draw Jane’s new budget constraint and indicate her chosen bundle with an
appropriately drawn indifference curve. Label her utility-maximizing bundle with the letter
C. (Be sure to determine the right quantities of both chips and Oreos!)
e) Draw a new diagram below your indifference curve diagram. Use your answers to parts
(b)–(d) to draw Jane’s demand for chips. Indicate her quantities demanded at prices of $2,
$3, and $4. Is there an inverse relationship between price and quantity demanded?
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