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In: Economics

Suppose that I have an income of $240 to spend on cat food (good x) and...

Suppose that I have an income of $240 to spend on cat food (good x) and cat toys (good y). The price of food is $30 per bag and the price of toys are $10 each. My utility function is given as

U(x,y)=xy

a) Solve my optimization problem. What is the optimal amount of food and toys that I should buy?

b) Suppose I can get a Costco membership for $60 and I can buy cat food for $20 per bag. Solve my optimization problem if I choose to get the Costco membership.

c) Should I buy the membership? Why or why not?

d) Graphically depict my budget constraints (one where I buy the membership and one where I do not), the indifference curves, and the optimal consumption bundles. Make sure to label everything.

Solutions

Expert Solution

Rahul Sunny answered 2 years ago
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