Question

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e Betty her brother, Bob enjoys his burgers only with fries. He always consumes both together. Which of the following best describes his preferences a. U(H,F) = 1010 b. U(H,F) = min{H,2F) C. U(H,F) = H+ 4.2F VI. A burger costs $5 (P) while a personal pan pizza costs $10 (Po). Your total income (1) is $100. 1. Write the equation for the budget constraint. (1 point) 2. Draw the budget constraint and label it AB (put burgers on the x-axis). Write the values for the x and y intercepts. (2 points) 3. Now suppose your income increases to $150. Draw your new budget constraint in the same graph as before. (1 point) 4. There is a special offer on pizzas and they cost $5, instead of $10 but your income is the original $100. Draw the associated budget constraint. (2 point)

Answer 1

(2) (b)

Since burgers and fries are consumed together, they are complements and are described by a fixed-proportion Leontief utility function.

(VI)

(1)

Budget constraint: I = b x Pb + p x Pp

100 = 5b + 10p

(2)

When b = 0, p = 100/10 = 10 (vertical intercept) and when p = 0, b = 100/5 = 20 (horizontal intercept).

20 Зо

(3)

New Budget constraint: I1 = b x Pb + p x Pp

150 = 5b + 10p

When b = 0, p = 150/10 = 15 (vertical intercept) and when p = 0, b = 150/5 = 30 (horizontal intercept).

In above graph, CD is new budget constraint.

(4)

New Budget constraint: I = b x Pb + p x Pp1

100 = 5b + 5p

When b = 0, p = 100/5 = 20 (vertical intercept) and when p = 0, b = 100/5 = 20 (horizontal intercept).

In above graph, EB is new budget constraint.