Question

11. Holly has $11 to spend on either shakes or pizza and wants to maximize her utility. The price of each slice of pizza is $2.00, and the price of each shake is $1.00 Slices of Pizza (0) Total Utility Marginal Utility Number of Total Utility Marginal Shakes (0) Utility 90 50 50 LAWN 90 170 240 300 350 390 60 90 120 140 155 165 50 Holly's optimal bundle is shakes. slices of pizza and

Answer 1

Answer:

Given: The price of each slice of pizza is $2 and the price of each shake is $1.

Thus, the budget constraint of Holly is 2Q_p+1Q_s=11

Where Q_p is number of slices of pizza and Q_s is the number of shake.

Using budget constraint we get

Pizza TU M U Shakes TU M U Pizza Shakes 240 300 350 390

The equilibrium condition of consumption maximizing utility is $\frac{MU_x}{P_x}=\frac{MU_y}{P_y}$

But in the table it is revealed that this condition is true when Q_p=2 and Q_s=7 because with this bundle,

$\frac{MU_x}{P_x}=\frac{MU_y}{P_y}=40$

Thus, Holly's optimal bundle is 2 slices of pizza and 7 shakes.