George has a 600 annual entertainment budget that he uses to buy ...

[mcmcdaniel]

George has a 600 annual entertainment budget that he uses to buy trips to the movies and dinners at local restaurants. The figure above shows indifference curves and budget lines for these two goods. The price of a movie is 15.
 
  a) Along budget line BL1, what is the price of a dinner?
  b) What combination of dinners and movies will George select along budget line BL1?
  c) Budget line BL2 represents a change in the price of dinners from that along BL1. What is the new price of dinners along this budget line?
  d) What combination of dinners and movies will George select along budget line BL2?
  e) Use the information in this problem to give two points on George's demand curve for dinners.

Question 2

In the above figure, if the natural monopoly is regulated using a marginal cost pricing rule, then the firm will
 
  A) produce 8 million units and make an economic profit of 24 million.
  B) produce 12 million units and make zero economic profit.
  C) produce 16 million units and incur an economic loss of 64 million.
  D) produce 16 million units and make zero economic profit.

[jsm54321]

Answer to Question 1

a) George can buy 20 dinners and his income is 600, so the price of a dinner is 30.
b) George will buy 20 movies and 10 dinners because this combination is on his budget line, and hence is affordable, as well as on the highest attainable indifference curve, and hence is the best combination.
c) If George spends all his income on dinners, he can purchase 40. Therefore the price of a dinner must be 15 (= 600 income/40 dinners = 15 per dinner).
d) George will buy 20 movies and 20 dinners because this combination is on his budget line, and hence is affordable, as well as on the highest attainable indifference curve, and hence is the best combination.
e) One point on George's demand curve for dinners is a price of 30 per dinner and a quantity demanded of 10 dinners (from part b). Another point is a price of 15 per dinner and a quantity demanded of 20 dinners (from part d).

Answer to Question 2

C