Economic homework

Homework #3

Q.1 (30 points) Park is always willing to give up 5 tangerines for 1 orange. The price of one orange is $1 and the price of one tangerine is $0.25. Park’s spending budget for orange and tangerine is $10.

(1) Park is currently consuming 16 tangerines and 6 oranges. Give a suggestion about the direction of substitution for Park to improve his satisfaction. Justify your suggestion using the economic meaning of the marginal rate of substitution and the market rate of substitution.

(2) To maximize his satisfaction, how many oranges and tangerines should Park purchase with $10 budget?

(3) Give a graph in which the optimal consumption point shown. Include both the budget line and an indifference curve related to the optimal consumption. Clearly label the axes and mark the coordinates of the optimal consumption point.

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