Question

3. Paul derives utility only from CDs and DVDs. His utility function is Sketch Paul's indifference curves for U-5, U-10, and U-20 Suppose Paul has $200 to spend and that CDs cost $5 and DVDs cost $20. Draw Paul's budget constraint on the same graph as his ndifference curves Suppose Paul spends all of his income on DVDs. How many can he buy and what is his utility? Show that Paul's income will not permit him to reach the U-20 indifference curve. If Paul buys five DVDs, how many CDs can he buy? What is his utility? Use a carefully drawn graph to show that the utility calculated in 3.5 is the highest Paul can achieve with his $200. 3.1 3.2 3.3 3.4 3.5 3.6

Answer 1

U = squareroot C * D U = 5, 10, 20 I = $200, P_C = $5, P_D = $20 P_c C + P_D D = 200 = > 15C + 20D = 200 The spends all incomes of DVDS the can buy D = 200/20 = (10) (U = 0) Paul's Income = 200, at I = 200, mRs = P/c, D/c = 5/20 C = 40 200 + 20D = > D = 5, D = 5 C = 20 at D = 5, C = 20 sufility = 10 The cont reach at U = 20 at 200 income D = 5, than C = 20 utility = 10