Connie has a monthly income of $20.00 that she allocates among two goods: meat (

ID: 1141511 • Letter: C

Question

Connie has a monthly income of $20.00 that she allocates among two goods: meat (M) and potatoes (P) Suppose meat costs $5.00 per pound and potatoes $2.00 per pound. Connie's budget line (Lt) is drawn in the figure to the right Suppose also that her utility function is given by the equation UMP-2M + P. What combination of meat and potatoes should she buy to maximize her utility? To maximize utility, Connie should buy 0 pounds of meat and 10 pounds cf potatoes. (Enter your responses rounded to two decimal places ) Connie's supermarket has a special promotion. If she buys 5 pounds of potatoes (at $2.00 per pound), she gets the next 5 pounds for free. This offer applies only to the first 5 pounds she buys. All potatoes in excess of the first 10 (the 5 she buys and the 5 that are free) are still $2.00 per pound U1 Using the multipoint curve drawing tool, draw Connie's new budget line. Label this 1254567890 11 12 13 14 15 Potatoes curve Carofully follow the instructions above, and only draw the required object When using the multbipoint curve drawing tool hit the cesco key to end your

Explanation / Answer

The utility given is in additive form, this shows that the goods in question are perfect substitutes of each other.

Since the consumer becomes indifferent between them, he spends all his income only on one good, so the condition for optimality is,

if Pm/Pp > MUm/MUp, then only potatoes would be consumed. Where Pm is price of meat, Pp is price of potaoes, MUm is marginal utility of meat and MUp is marginal utility of potato.

And, if Pm/Pp < MUm/MUp then meat would be consumed.

U = 2M + P

MUm = TU/M

MUm = 2.

MUp = TU/P

MUp = 1.

Pm/Pp = 5/2.

MUm/MUp = 2/1

Optimality condition is therefore, 5/2 > 2/1

And thus only potatoes would be consumed.

Quantity of potato purchased = income/price.

Q = 20/2 = 10 units.

Thus consumer buys 0 pounds of meat and 10 pounds of potato.

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Connie has a monthly income of $20.00 that she allocates among two goods: meat (

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