an income of $120/month and are each consuming a bundle containing a and DVD ren

Question

an income of $120/month and are each consuming a bundle containing a and DVD rentals. Last month, they both rented 8 DVDs (movies) . Bill and Ted each have UTed Usu DVDs (4) Who values DVDs more, Bill or Ted? Explain how you know. a. Ted DVDs rent for S5 each and Pr-$I, is it possible that Bill and Ted both maximize their utility by b. iDVDs per moth? Explain bow you know. consuming 8 5(8)+ 2-12o or Fale: If both were to adjust their consumption to c. (4) True F e Ge the same MRS at their optimal bundle? Explain bow you know utility, they would both

Explanation / Answer

a) From the diagram given it is evident that the indifference curve for Bill is steeper than that of Bill. This implies (MRSD,Z )Bill > (MRSD,Z )Ted. MRSD,Z = MUD/MUZ, therefore marginal utility from DVD rental is higher for Bill. Thus Bill values DVD rentals more.

b) No, because at D = 8 units the indifference curves of Ted and Bill cuts each other this implies that given the prices the budget line will be tangent to one of their indifference curve and will cut the indifference curve of the other. Therefore, only one will maximize the utility at D= 8 units.

c) True,Because at the optimal level the slope of the indifference curve i.e. MRS must equal slope of budget line. This can happen only if the indifference curve of both TED and BILL are tangent to each other.

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