Question

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Answer 1

1) We are given the following three basket of goods:

	Food	Clothing
A	5	3
B	10	8
C	7	5

Both Food and Clothing are normal goods and consumers gain more utility by consuming more of it. Thus consumer will prefer that basket the most with the highest units of good, that is, basket B. Thus B is the most preferred basket as it gives the consumer 18 units of goods.

By the same logic, basket A will be the least preferred as it provides the consumer with lesser amount of both the goods.

2) In the given problem, budget of Philip is 516, which needs to be allocated between the 2 goods. Price of apple (Pa) = 2 and Price of Cantaloupe (Pc) = 4

1) The equation of the budget line is given as: Pa*A+Pc*C = M, or 2A+4C = 516

2) If he spends all his money on Apples, C = 0. He can buy 516/2 = 258 Apples.

3) If he spends all his money on C, A = 0. He can buy 516/4 = 129 Cs.

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