Question

QUESTION 2 Steve spends his summers in Florida hanging out with friends at the beach, eating meals of hot dogs and lemonade. The hot dog-lemonade combo costs $5 and Steve's utility from consuming the combos, C, is U(C) - 4000.5. Given this information, Steve optimizes by consuming bo) meals.

Answer 1

Steve will optimize the utility when marginal utility equals the price i.e., MU=Price.

To calculate marginal utility, we will differentiate the given utility function.

$U(C)=40C^{0.5}$

$\frac{dU(C)}{dC}=\frac{20}{\sqrt C}$

$So,\: Marginal\: utility=\frac{20}{\sqrt C}$

Given that hot dog-lemonade combo costs $5.

To find how much Steve should consume to optimize, we equate marginal utility and price.

$\frac{20}{\sqrt C}=5$

${\sqrt C}=4$

$C=4^{2}=16$

So, Steve optimizes by consuming 16 meals.