Elmo finds himself at a Coke machine on a hot and dusty Sunday. The Coke machine requires exact change – two quarters and a dime. No other
combination of coins will make anything come out of the machine. No
stores are open; no one is in sight. Elmo is so thirsty that the only thing
he cares about is how many soft drinks he will be able to buy with the
change in his pocket; the more he can buy, the better. While Elmo searches
his pockets, your task is to draw some indifference curves that describe
Elmo’s preferences about what he finds. (Use the vertical axis for Dimes
and the horizontal axis for Quarters on your graph).
a. If Elmo has 2 quarters and a dime in his pockets, he can buy 1 soft
drink. How many soft drinks can he buy if he has 4 quarters and 2
dimes?
b. Use red ink to shade in the area on the graph consisting of all
combinations of quarters and dimes that Elmo think are just
indifferent to having 2 quarters and 1 dime. (Imagine that it is
possible for Elmo to have fractions of quarters or of dimes, but, of
course, they would be useless in the machine.) Now use blue ink to
shade in the area consisting of all combinations that Elmo thinks
are just indifferent to having 4 quarters and 2 dimes. Notice that
Elmo has indifference “bands,” not indifference curves.
c. Does Elmo have convex preferences between dimes and quarters?
d. Does Elmo always (strictly) prefer more of both kinds of money to
less?
e. Does Elmo have a bliss point?