Question

2. Karen likes to consume sandwiches and brownies. Her daily utility from consuming different quantities of sandwiches and brownies is given in the following table: Sandwiches TU Brownies TU 0 0 39 1 38 76 2 1113 102 1444 175 5 150 2046 2317 182 2568 192 2799 198 300 10 200 319 11 198 Suppose that Karen's daily income is $33 and the prices of the goods are Ps = $3, PB = $2. A. Find Karen's optimal consumption bundle. B. If now Karen's income decreased to $25, what is new optimal choice for Karen?

Answer 1

A. Karen's budget constraint= 3S+2B=33

With 6 units of sandwiches and 6 units of brownies, Karen's total cost is 30. (6*3+6*2=30) Her total utility in this scenario is 372.

Her total utility in this bundle is higher than any other bundle she chooses to consume. For eg: if she chooses to consumes 11 units of sandwiches and 0 units of brownies her total cost would be $33 which is affordable. However, her total utility is 319 in this case which is way lower than what she is getting when she chooses the bundle (6,6).

B. Karen's new budget constraint= 3S+2B=25

Karen would choose the bundle (5,5) as the total cost for her with this bundle would be 25 which is affordable. Also she gets a total utility of 325 which is the highest possible utility she can get with this income.