Jeff has a monthly income of $400, which he spends each month on dinners (which cost...

Jeff has a monthly income of $400, which he spends each month on dinners (which cost $20 each) and movies. He finds that he maximizes his utility by spending half his income on dinners and ha lf on movies. His marginal rate of substitution at this bundle of goods is 0.4 (measured with dinners on the horizontal axis).

a. Given this information, what is the price of movies?

b. Draw Jeff's budget constraint and indifference curve at this optimal bundle. Label both axes appropriately.

c. Write an equation—in slope- intercept form—for Jeff's budget constraint.

d. What is the opportunity cost, in terms of dinners, of an additional movie? e. Now suppose the price of dinners changes to $25. Show on your diagram how the budget constraint will change. Can Jeff still afford his initial bundle from part b?

Expert Solution

Rahul Sunny answered 8 months ago

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