Assignment 5:

Indifference Curves:
1. The following table represents Sakibs preferences for bottled water and soft
drinks, the combination of which yields the same level of utility.
a) Calculate Sakibs marginal rate of substitution
of soft drinks for bottled water at each rate of
consumption of water.
b) Using the information provided illustrate
Sakibs indifference curve, with water on the
horizontal axis and soft drinks on the vertical axis.

Bottled Water

Soft Drinks

5
10
15
20
25

11
7
4
2
1

c) Sakibs monthly budget for bottled water and soft drinks is $23. The price of
bottled water is $1 bottle, and the price of soft drinks is $2 per bottle. Whats the
budget equation? Calculate the slope of Sakibs budget constraint.
d) Find the combination of goods that satisfies Sakibs utility maximization problem
in light of her budget constraint. Using the indifference curve diagram you
constructed in b, add in Sakibs budget constraint using the information in c.
Illustrate the utility-maximizing combination of bottled water and soft drinks.
2. Draw figures that show your indifference curves for the following pairs of goods:
a) Right gloves and left gloves
b) Coca-Cola and Pepsi
c) Rice and Vegetables
For each pair, are the goods perfect substitutes, perfect complements or Ordinary
goods?

Profit:
3. The sole proprietor of the "Khan Brothers" clothing store receives all accounting
profits earned by her firm and a 12, 00,000 taka-a-year salary that she pays herself.
She has a standing salary offer of 19, 00,000 taka a year if she agrees to work for a
large international clothing brand. If she had invested her capital (machineries,
clothing material) outside her own company, she estimates that would have
returned 47, 00,000tk a year. Last year, her accounting profit was 85, 00,000tk.
What was her economic profit?
4. Sunny owns and operates Sunnys Cold Coffee Stand. Use the data in the table
provided to answer the questions below.

Sunnys Sno Cone Stand: November, 2016

Price of Cold Coffee: 45 taka
Cold Coffees Sold: 2,000
Explicit cost: 1000 taka
Depreciation: 200 taka
Implicit cost of capital: 1500 taka
a. Calculate Sunnys Cold Coffee Stands total revenue.
b. Calculate Sunnys Cold Coffee Stands accounting profit and economic profit
c. Explain how Sunny would determine whether or not to continue operating the
business on the basis of these numbers.

Technological and Economic Efficiency:

5. Alternative ways of dry-cleaning 100 shirts are
Method
Labor (hours)
A
1
B
5
C
20
D
50

Capital (machines)
10
8
4
1

a. Which methods are technologically efficient?

b. Which method is economically efficient if the hourly wage rate and the implicit
rental rate of capital are as follows:
(i) Wage rate $1, rental rate $100?
(ii) Wage rate $5, rental rate $50?
(iii)Wage rate $50, rental rate $5?