Herbert spends all $640 of his paycheck on food (F) and shelter (S); each good costs $8 per unit. Herb’s preferences satisfy all of the usual assumptions, and so are “well-behaved”. a) (1) Write down the equation of the Herbert’s budget line (BL) b) (1) Using at least 1/3 page, sketch Herbert’s budget line; put shelter on the horizontal axis. c) (2) What is the slope of the line in (a)? What is its economic significance? d) (2) On your diagram for (b), sketch Herbert’s indifference curves through bundles A and B, respectively, given the following information: ICA: Herbert spends his entire budget, but consumes too little shelter at A ICB: Herbert is optimizing at B. e) (1)) What is the value of Herbert’s MRS of food for shelter at bundle B? How do you know this? f) (1) How does his MRS of food for shelter at bundle A compare to that at bundle B? How do you know this?
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