Question

(a) Tangi loves Unam shandy, which she makes by combining one glass of oshikandela and two scoops of ice cream. Pandu is on a diet that assigns points to food and drinks. One glass of oshikandela is one point and one scoop of ice cream is one point. She can consume any combination of oshikandela and ice cream as long as the total number of points is tw

o. (i) What king of goods are oshikandela and ice cream for Tangi? Show her indifference curves on a graph. (5)

(ii) What kind of goods are oshikandela and ice cream for Pandu? Show her indifference curves on a graph. (5)

(iii) Define and illustrate mathematically the consumer problem. (5)

(iv) With the aid of a diagram explain the consumer equilibrium. (5

Answer 1

Let quantity of oshikandela denoted as O

Let quantity of ice cream be denoted as C

(i)

Unam shandy is prepared by mixing both oshikandela and ice-cream So, O and C are said to be perfect complements of each other.

The utility function of Tangi looks like following:

U(O, C) = Min ( 2O, C )

These are called Leontief Preferences and the indifference curves are L-shaped as shown on below graph:

(II)

For Pandu, both the goods are substitutes of each other. Following is the utility function:

U = O + C

And the indifference curves are downward sloping straight lines as shown in below figure:

(iii)

Consumer Problem for Tangi:

Maximize U = Min ( 2O, C ) subject to Budget constraint: Po*O + Pc*C = M

where P0 = price of oshikandela

Pc = price of ice cream

M = income

Similarly,

Consumer Problem for Pandu:

Maximize U = O + C subject to Budget constraint: Po*O + Pc*C = M

where P0 = price of oshikandela

Pc = price of ice cream

M = income

(iv)

Consumer Equilibrium for Tangi:

at equilibrium, 2O = C and the IC is tangent to the Budget Line. It occurs at point F in the below graph:

Consumer Equilibrium for Pandu:

at equilibrium, corner solution exists as shown by point A and B. Either oshikandela is used or only ice-cream is used in making Unam shandy

**if you liked the answer, then please upvote. Would be motivating for me. Thanks