Jessica spends all her money on bags(B) and shoes(S). Her utility function is U(B,S) = 2...

Jessica spends all her money on bags(B) and shoes(S). Her utility function is U(B,S) = 2 * B^0.5 * S^0.5 . Her income is 150$. Price of shoes is Ps = 2. Price of bags depends on the number of bags purchased. Bags cost $5 each if she purchases between 1 and 8 bags. If she purchases more than 8 bags, the price falls to $2 for all subsequent bags.

a) Draw Jessica's budget constraint where bag is on the horizontal axis.

b) Solve Jessica's optimal bundle.

c) Suppose Jessica's utility function U(B,S) = 0.5 * ln(B) + 0.5 * ln(S). What is her optimal bundle?( Hint: Compare the MRS for both utility functions)

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Expert Solution

Rahul Sunny answered 1 year ago

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