Institute of Health Economics, University of Dhaka
B.S.S. (Honors) 2nd Year 3rd Semester (Batch 14, Session: 2023-2024)
HE 201: Microeconomics I
In-course Test 1
Total Marks: 10 Set - B Time: 50 Minutes
Answer the following questions:
1. A small business owner needs to transport goods to customers. She can either hire a van
(Good 1) or a truck (Good 2). She only cares about the total cargo capacity, not the type of
vehicle. Her preferences can be represented by:
u(x1, x2) = 5x1 + 2x2
where x1 = number of vans hired, x2 = number of trucks hired [4]
i. Draw the Indifference Curve (Clearly calculate and label the intercepts and the slope)
ii. Interpret the meaning of the slope
iii. Explain whether these preferences represent perfect substitutes or perfect complements.
Justify your answer.
iv. Do these indifference curves exhibit a diminishing MRS? Why or why not?
2. Suppose Alice likes two types of snacks: cookies (Good 1) and chocolate bars (Good 2).
She has a budget of $80. The price of a cookie is $2, and the price of a chocolate bar is $4.
(a) Draw the budget line and calculate the slope and intercepts. Label them accordingly.
Interpret the meaning of the slope. [2]
(b) Now, suppose that in order to discourage overconsumption of cookies, the government
imposes a tax of $3 per cookie for every cookie beyond 20 units. [4]
i. Draw the new budget line (Clearly calculate and label the slope and intercepts)
ii. Calculate and show the kink point in the figure.
iii. Compare the slope before and after the kink and explain what the slope change means
for Alice’s trade-off between cookies and chocolate bars.