Question

6. Perfect Complements Oliver is very specific about his business attire. He always buys three white shirts (xv) for every pair of trousers (xt). Oliver's total budget for clothing is $200. The price of each white shirt (pw) is $5 and the price of each pair of trousers (pt) is $25. (20 points) a. Given Oliver's preferences, what is his corresponding utility function? b. What is Oliver's budget constraint? c. What is Oliver's optimum consumption bundle? d. Draw the indifference curve and the budget constraint on a clearly labelled graph to illustrate Oliver's optimum consumption bundle.

Answer 1

A. U= min(Xw, 3Xt)

Shirt and trousers are Complementary goods.

B. Budget constraint:

Pw*Xw+Pt*Xt= Income

5Xw+25Xt= 200

C. Xw=3Xt put this in budget constraint

5*3Xt+25Xt= 200

Xt*= 200/40= 5

Xw*= 3*5=15

Optimal bundle is 3 trousers and 15 white shirts.

D.

Trouser Optimal bundle NWAG00 BL -5 0 5 10 15 20 White shirt 25 30

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