1. Mongkut lives on a farm. On his farm, he grows vegetables and raises animals to be used for meat. He consumes some of his output and trades the rest. In the current period his farm yielded 30 kg of vegetables and 10 kg of meat. For Mongkut, and his trading partners in the nearby villages, types of meat are perfect substitutes for each other, and types of vegetables ae perfect substitutes with each other. Currently, both 1kg of mixed vegetables and 1kg of mixed meats are priced at 5 units of the local currency.
(a) What is the value of Mongkut’s endowment? Show his budget constraint.
(b) Mongkut has his own ideas about the meaning of a ‘balanced’ diet and will only eat vegetables and meat in a 1:1 ratio. What are the quantities in his optimal bundle? What are his net demands? Illustrate his preferences and optimal choice.
(c) Imagine that before Mongkut got to trade, the price of meat increased to 15 while the price of vegetables stayed at 5. How would this effect his gross and net demands? Illustrate.
(d) What is the size of the substitution effect on the demand for meat? The ordinary income effect? The endowment income effect?
(e) How would this case be different if Mongkut was always happy to swap 1 kg of vegetables for 1 kg of meat in consumption?
