Bismark has peculiar preferences He has linear indifference

Bismark has peculiar preferences. He has linear indifference curves with slope -1 over pretzels and
beer. Last year, when the price of pretzels was $4 and the price of a pint of beer was $2, you observed
that the utility maximizing Bismark consumed 20 pints of beer and no pretzels. This year, a bad hop
harvest raises the price of beer to $5. Which of the following statements is true, given that neither his
income nor preferences have changed?
A. Bismark will consume 8 pints of beer and no pretzels.
B. Bismark will consume 10 pretzels and no beer.
C. Bismark will now divide his income equally between pretzels and beer.
D. For Bismark beer and pretzels are perfect complements.
E. We can’t tell what happens to Bismark’s optimal bundle but we know he’ll be better off.

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2.

The figure above shows a Slutsky decomposition of a fall in the price of popcorn. The initial budget
line and indifference curve is in black and labeled BL1 and IC1. The final budget line and indifference
curves are in green; BL3 and IC3. Which of the following statements is false?
A. The change in behavior going from bundle B to C shows the income effect.
B. The change in behavior going from bundle A to B shows the substitution effect.
C. Popcorn is not an inferior good while steak is a normal good.
D. Based on total effect, steak and popcorn are complements.
E. Popcorn is not a Giffen good.

Solution

Slope of indifference curve = -1
=> -1 = P
The budget equation is :-
Price of pretzels * Quantity of pretzels + Price of pint of beer * Quantity of pint of beer = Total Income
= > 0 + 20* 2 = Total Income
=> Total Income = 40 $
After bad year,
Price of beer = 5$
As given , nieither his income nor preferences have changed
So, with 5$ he can buy 40$/5$ = 8 pint of beer

The answer is A. Bismark will consume 8 pints of beer and no pretzels.

2) The answer is D. Based on total effect, steak and popcorn are complements.
Because steak is sort of meat - for complement good for porcorn will be popcorn+movie
and for steak will be steak+whisky as people prefer to have meat with whisky.