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ECON2233 Individual Homework 1
(Due on Mar 17 Friday, by 12 noon)
10 points, equivalent to 5% of the unit’s assessments
1. Julio receives utility from consuming pizza (P) and movie (M) as given by the utility
function (,) = √, where P and M denote the amount of pizza and movie
Julio consumed. The marginal utility Julio receives from pizza and movie are given
. The price of pizza and movie are given as = 16
= 8, Julio has an income of $96.
Show the derivation process that leads to the final solution for all parts of question.
a) What is Julio’s optimal bundle of pizza and movies that maximizes his utility?
And draw Julio’s indifference curve and budget constraint in a diagram and
identify the optimal bundle. Please show quantity of movies on x-axis and
quantity of pizzas on y-axis. (2 marks)
b) Holding the price of pizza and Julio’s income unchanged, what’s his new optimal
bundle when price of movie rises to $12? What’s his new optimal bundle if price
of movie falls to $6? Draw his new budget constraints in the previous diagram for
both scenarios and identify the optimal bundles. (2 marks) Derive the demand
curve for movies in a new diagram accordingly. (1 marks)
2. Jim spends most of his time in Coffee Club in Perth. Jim has $24 per week to spend
on coffee and muffins. Coffee Club sells muffins for $4 each and coffee for $2.40 per
cup. He consumes cups of coffee and muffins per week.
a) Draw Jim’s budget constraint and label the axis properly. (1 marks)
b) Now Coffee Club introduces a frequent-buyer card: for every five cups coffee
purchased at the regular price of $2.40 per cup, Jim receives a free sixth cup.
Draw Jim’s new budget constraint. (2 marks)
c) Does the introduction of the frequent-buyer card necessarily encourage Jim to
consume more coffee? Show how your answer depends on Jim’s preference map.
Please typewrite your answers. You should attempt to draw the graphs in MSWord or similar
word processing software. Label your graphs. If you absolutely cannot draw graphs in
software you can draw them by hand, ensure they are very clear, take a photo/scan and insert
them in your MSWord file. Writing all of the assignment by hand and scanning it in is not
appreciated – you should at least type in your non-graph parts of the answers.
Save a copy of your assignment as a backup.
Convert your assignment into a pdf file and upload them in the Assessments > Assessment 2
(home work 1) > Online Short Answer Homework link on LMS. You can submit only once,
so go over your work thoroughly before you pdf it and upload it.