You really love ice cream (trust me on this). In particular, you love vanilla ic

Question

You really love ice cream (trust me on this). In particular, you love vanilla ice cream, and you love chocolate ice cream, but you love vanilla just a little bit more. Your ice cream utility function is given by U(V,C)=1.5V+C. Assume vanilla ice cream costs $2/gallon, and chocolate ice cream costs $1/gallon. If you have $10 to spend, how will you allocate it between vanilla and chocolate ice cream?

A. 5 gallons of vanilla ice cream
B. 10 gallons of chocolate ice cream
C. 2 gallons of vanilla ice cream and 6 gallons of chocolate ice cream.
D. 5 gallons of vanilla ice cream, and 10 gallons of chocolate ice cream.

Explanation / Answer

let the number of gallons of vanilla be "V" and of chocolate be "C"

money spend on vanilla icecream = 2V

money spend on chocolate icecream = C

2V + C = 10 ,

utility function is given by U(V,C) =1.5V+C.

for 1 chocolate = 1.5 vanilla

3.5V = 10

V = 2.87 2 gallons

C = 6

so option (c) 2 gallons of vanilla ice cream and 6 gallons of chocolate ice cream

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