Question: 1. Bobby is a college student who has €500 of income to spend each semester on books and pizzas. …

30 Apr Question: 1. Bobby is a college student who has €500 of income to spend each semester on books and pizzas. …

Posted at 19:01h in 2Past Paper by Exams

1. Bobby is a college student who has €500 of income to spend each semester on books and pizzas. The price of a pizza is €10 and the price of a book is є50. Suppose he consumes 20 pizzas. (a) Assuming that Bobby wants to maximie utility, draw Bobby’s budget constraint and indifference curve. (b) Now, suppose Bobby’s parents buy him a €300 gift certificate each semester that can only be used to buy You can assume that his indifference curves are regular (strictly convex) books, Draw Bobby’s budget constraint when he has the gift certificate in addition to his є500 income. Is Bobby better-off with the gift certificates? Explain why/why not. (c) Using what you know about preferences, in general would a consumer prefer a 300 gift certificate or 300 in cash? Explain your answer using diagrams where possible.

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