Econ 301Intermediate MicroeconomicsProf. Marek WeretkaProblem set 1(due Thursday, Febru ary 2nd, before the class)Problem 1. (Chapter 1)Question 4 from Chapter 1, Varian (our textbook), pp. 19.Note: I did not cover Chapter 1 in class. You are expected to read Chapter 1 carefully and solve thisproblem.Problem 2. (Murphy’s budget set)Murphy spends his total monthly income of $100 on two commodities: french fries and b eef jerky. Theprice o f a portion of french fries is $2 and beef jerky is $5 (per pack).a) Write down M urphy’s budge t constraint.b) Find the maximal consum ption of french fries (this number is called a real income in terms of frenchfries)c) Find the maximal number of packs of beef jerky possibly consum ed by Murphy (a real income in termsof beef jerky)d) In a two-dimensiona l co ordinate system, in w hich beef jerky is measured on the vertical axis and fren chfries on the horizontal one, draw a red budget line. Using pencil, show all the bun dles that are affordable (thebudget set). Whe re can we find the quantities you found in a) and b) on the graph ?e) W hat is the slop e of the b udget line? How would you interpret it?f) Because of the Mad Cow Disease, the price of beef jerky increases to $10 (due to the smaller supply ofb eef). On a separate graph, plot show how the Mu rphy’s b udget set is a ffected? Is the shift parallel? W h atis the new relative price of french fries in term s beef jerky?g) B ecause of severe shortages in the supp ly of beef, a "Jerky" Bill is passed by US C ongress, allowingeach con sume r to purchase at most 5 packs. Show on the graph how the new legislation affects Murphy’sbudget set.Problem 3. (Budget set with taxes)Amy receives a yearly stipend of $2000 from the UW-Madison. She spends it on milk ($1 per bottle) andpunk rock C D s ($20 each).a) W hat is the relative price of a CD is terms of milk?b) Draw Amy’s budget set (CD on the horizontal axis).c) In orde r to reduce noise in Madison area, the governor of Wisconsin imposes an ad valorem sales taxon punk rock CDs, w ith the rate of 100%. How is Amy’s b udget set altered by the new regulation? What isthe new relative price of CD?d) Amy’s sister Priscilla currently living in California, after learning ab ou t a new tax in Wisconsin, decidesto help Amy, by sending her 5 CD. Draw Amy’s new budge t set, taking into account the present from California(assume that the tax still holds).Problem 4. (Indifference Curves)Use a coordinate system with ice cream measured on the horizontal axis a nd cho c ola te on vertical one toillustrate your preferences by plotting indifference curves ifa) you like both ice cream and cho colate a lot.b) You like ice cream , but you hate chocolatec) You like ice cream, but you do not care (you are indiffere nt) a bout the cho colate1January 27e) You always eat ice cream and chocolate in the same prop o rtion (1:1)d) What is the sign of M RS in each of the first three cases?Problem 5. (Convexity and monotonicity)a) Consider Figure 3.4 (pp. 40) from Varian. Are the preferences depicted in this graph convex? Strictlyconvex? Monotone? Ju stify your answer using the g raphs.b) Repeat the same exercise for preferences deoicted in Figure 3.7 (pp.