1. For each of the following situations, decide whether the bundle Lakshani is c
ID: 1194794 • Letter: 1
Question
1. For each of the following situations, decide whether the bundle Lakshani is considering optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on.
a. Lakshani has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters cost $20 each. She is thinking about buying 2 pairs of sneakers and 5 sweaters. She tells her friend that the additional utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater.
b. Lakshani has $5 to spend on pens and pencils. Each pen costs $0.50 and each pencil costs $0.10. She is thinking about buying 6 pens and 20 pencils. The last pen would add five times as much to her total utility as the last pencil.
c. Lakshani has $50 per season to spend on tickets to football games and tickets to soccer games. Each football ticket costs $10 and each soccer ticket costs $5. She is thinking about buying 3 football tickets and 2 soccer tickets. Her marginal utility from the third football ticket is twice as much as her marginal utility from the second soccer ticket.
Explanation / Answer
a. The combination she is planning is optimal because at this combination the additional utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater and at this combination he is spending his entre income
Budget line equation = P1Q1 +p2Q2 = 50*2+20*5 = 100+100 =200
b.The combination she is planning is not optimal because at this combination the additional utility she would get from thetwo commodities is not the same. However, at this combination she is spending his entre income
Budget line equation = P1Q1 +p2Q2 =0.50*6+0.10*20 = 3+2 =5
c. The combination she is planning is not optimal because at this combination the additional utility she would get from thetwo commodities is not the same. However, at this combination she is spending his entre income
Budget line equation = P1Q1 +p2Q2 =10*3 +2*5 = 30+20 = 50
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