3550 F10 Quiz 3 Last Name: First Name:
1
1. (10) Suppose that the Margie spends her monthly income of $90 on books and “all other goods
(AOG)”. The price of book is $5 and the price of “all other goods” is normalized to $1. She currently
maximizes her utility by buying 10 books and 40 AOG. Emazon.com, the internet book store,
provides a new membership plan for a $10 monthly fee. With the membership, the price of book is
only $4. Consider an indifference curve-budget line diagram with books on the horizontal axis and
“all other goods” on the vertical axis.
a. (4) Draw Margie’s budget constraints both if she buys the membership and if she does not.
b. (1) Will her budget line with the membership lie above, lie below, or pass through her initial
optimum (10 books)? Explain your answer.
c. (3) Determine whether Margie will buy the membership or not. Explain your answer. (Add
indifference curves on the diagram from part “a” if needed.)
d. (2) If Margie decides to buy the membership, what will be her MRS (i.e. marginal value of a
book) at her NEW optimal bundle?
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