Question

Suppose that Ken cares only about bathing suits (B) and flip-flops (F). His utility function is U = B 0.6F 0.4. The price of bathing suits are $10, and the price of flip-flops are $4. Ken has a budget of $100.

a)Draw a graph containing Ken’s budget line with bathing suits (B) on the x-axis and flip-flops (F) on the y-axis. Define the slope of this line.

b)Define the two conditions that need to be met for a consumption allocation {B ∗ , F ∗} to maximization consumption.

c)What is the marginal utility of good B (MUB) and of good F (MUF) for Ken.

d)What is the optimal choice of B and F for Ken to maximize his utility?

Answer 1

9) Budget constraint: PB .B + P = F = m IOB + 4F = 100 when B=0, F = 100 = 25 when Fro, B= 100 = 10 slope = los . 10. 2.5 23 It two means goods the is market rate equal to 2.5. of enchange between Consumption allocation is said to be optimal or utility maximusing when the combination. mones mRs = PB & expenditure on that combination la enhaust all the - u - Bobrou muB= by = 0.6 B-04 FOU mux - ou 0.4806 F-06

At optinium 0.6B-04 F06 - 0.4 Bob F-6 3 - 5 B B = 3F 10B + 4F - 100 + 4F = loo 16 IOF = 100 10 B = 3410) = 6 3 Llo)