Question

d. Now a third good, chocolate (C), enters her utility function: U = C x (M + R)

Graph her indifference curve for U = 100, with C on one axis and the combined (M + R) on the other axis.

e. The price of chocolate is $20 per unit, movies are $10, and restaurant meals are $10. Given a budget of $120, what is Susan’s optimal bundle of goods to consume?

Answer 1

d) The utility function of the consumer is given as:

U = C(M + R)

The indifference curve can be shown as:

e) The price of chocolates is $20

The combined price of movies and restaurant meals =$( 10+10) =$20

The income of the consumer is $120

The budget constraint of the consumer is given as:

20C +20 (M+R) = 120

The optimal bundle of the consumer is obtained at a point where,

MU_c/ MU_M+R =P_C/ P_M+R

U =C(M+R)

MU_C= M+R

MU_M+R = C

P_C= $20

P_M+R =$20

M+R /C = 20/20

M+R = C

Putting thi value in the budget function,

20C +20 (M+R) = 120

20C +20C= 120

C= 30

Thus, M+R= 30

The optimal bundle containes 30 units of Cand 30 units of M+R