1. Explain utility maximization using the concepts of indifference curves and budget lines.
2. Explain the notion of the marginal rate of substitution and how it relates to the utility maximizing solution.
3. Derive a demand curve from an indifference map.
Utility Maximization and Demand
1. Suppose a consumer has a budget for fast-food items of $20 per week and spends this money on two goods, hamburgers and pizzas. Suppose hamburgers cost $5 each and pizzas cost $10. Put the quantity of hamburgers purchased per week on the horizontal axis and the quantity of pizzas purchased per week on
the vertical axis. Draw the budget line. What is its slope?
2. Suppose the consumer in part (a) is indifferent among the combinations of hamburgers and pizzas shown. In the grid you used to draw the budget lines, draw an indifference curve passing through the
combinations shown, and label the corresponding points A, B, and C. Label this curve I.
Combination Hamburgers/week Pizzas/week
A 5 0
B 3 ½
C 0 3
3. The budget line is tangent to indifference curve I at B. Explain the meaning of this tangenc
