Choice and Cost Benefit Analysis > Indifference Curves and Budget Constraints

Tie Dye and Earth Shoes

Susie Sixties consumes only two goods: tie dye dresses and earth shoes. Dresses cost $15 each and a pair of earth shoes goes for $20. Susie likes her shoes to match her dresses, so she always buys exactly two dresses for each pair of shoes.

  1. Assuming her total budget is $100, draw Susie's budget constraint and a couple of her indifference curves. Show her equilibrium and calculate how many dresses and pairs of shoes she consumes.
  2. Suppose Susie gets a job and earns an extra $50. Show her new equilibrium and calculate her consumption of each good.
  3. Starting from the initial equilibrium in part (1), suppose the price of dresses falls to $10 each. Assuming Susie can buy fractions of both dresses and pairs of shoes, calculate her new consumption. Show your results on a graph.
Solution
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 08/17/2016