(Solved): There are two parts. Part 1 has 3 short questions, worth 15 points each. Part II has 25 multiple-c ...

There are two parts. Part 1 has 3 short questions, worth 15 points each. Part II has 25 multiple-choice questions, worth 3 points each. Total points $=120$. All answers for the essay questions in Part I should be put in the Answer Book. All answers for the multiple-choice questions in Part II should be put on the Bubble Paper. At the end of the exam, please hand in borh questions and answers. Good luck. PART I Essay Questions 1. Suppose the price of a bottle of milk (M) is $\$5$ and the price of a donut (D) is $\$2$, and Li's budget is $\$90$ for milk and donut. Also, suppose that at bundle $M=10(10$ bottles of milk) and $D=20(20$ donuts), the marginal utility (MU) of milk is 25 and $\mathrm{MU}$ of donut is 10 for $\mathrm{Li}$. a. Draw the budget line in a diagram as represented below. (Again, draw the diagram in your Answer Book). Can $\mathrm{Li}$ afford to buy 10 bottles of milk and 20 donuts? Show the bundle $M=10$ and $D=20$ in your graph. b. At the bundle $M=10$ and $\mathrm{D}=20$, what is the amount of utility (satisfaction) Li gets from the last dollar he spends on $M$ ? c. At the bundle $M=10$ and $D=20$, what is the amount of utility (satisfaction) Li gets from the last dollar she spends on D? d. To maximize satisfaction, should Li buy 10 bottles of milk and 20 donuts? Explain. e. Suppose the price of milk decreases from $\$5$ to $\$4$; and the price of donut increases from $\$2$ to $\$2.50$. With the same income of $\$90$, would Li be definitely better off? Explain.