1.(20 points) Dr. Simran Kahai cant have beef.  Her religion prohibits her from consuming beef.  If she consumes beef even accidently, she will have to face negative social consequences after she consumes beef.  Every 8 ounces of beef she accidently consumes, to keep herself feeling not so guilty, she goes to an extra hour of religious studies class with her private religious studies instructor.  But, to Dr Kahai, as she realizes that she has consumed beef, beef consumption become bad or give negative utility. This means that she gets less satisfaction by consuming more of that (bad) commodity. Thus, the good becomes a bad. In this case, Dr. Kahai will get more satisfaction if she consumes less and less of the bad commodity.  
Her parents pay her private religious instructor $50 an hour.  The total budget (including beef) and religious studies lessons is $500.  
Price of 8 oz. beef = $25
P of Religious Studies Lessons = $50
Income/budget = $500

A.    Draw a budget constraint for Dr. Kahai.  Measure Beef on the horizontal axis and Religious studies lessons on the vertical axis.  Make sure it is labeled correctly and comprehensively.  Numbers and labels should be on the graph. Write down the budget equation.  What is the slope of the budget constraint?  Use religious studies lessons as a dependent variable.  

B.    Draw the indifference map for Dr. Kahai.  Measure Beef on the horizontal axis and Religious studies lessons on the vertical axis.  Label each of the curves and arrow to indicate the direction of higher level of satisfaction.

C.    Comment on the marginal utility of beef as she consumes more of it and marginal utility of the religious studies lessons as she attends more lessons. How do these relate to decreasing marginal utility and increasing marginal disutility? 

Now assume that both Beef and Religious studies lessons are economic bad for Dr. Kahai meaning she receives less utility from consuming more of religious studies lessons and Beef.  Her parents still pay her private religious instructor $50 an hour.  The total budget (including beef) and religious studies lessons is $500.  Now The religious studies lessons tutor is having a special where every three lessons that Dr. Kahai takes, two lessons are offered at no additional charge.  But, each person can have maximum of 4 free lessons.  
Price of 8 oz. beef = $25
P of Religious Studies Lessons = $50
Income/budget = $500
D.    Draw the new budget constraint with the buy three two free offer with 4 free limits.  Label each axis with numbers and each kinked point with numbers of beef and religious lessons.  Each of the intercepts must be numbered and labeled.

E.    Draw the indifference map for Dr. Kahai with the new assumptions above.  Label each of the curves and arrow to indicate the direction of higher level of satisfaction.

F.    Comment on the marginal utility of beef as she consumes more of it and marginal utility of the religious studies lessons as she attends more lessons. Do these relate to decreasing marginal utility? Or increasing marginal disutility? Explain.

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