John is indifferent between canned soup and fresh soup, that is, he derives as much pleasure...

John is indifferent between canned soup and fresh soup, that is, he derives as much pleasure (utility) from consuming x servings of canned soup as he does from consuming x servings of fresh soup. Canned soup sells for $1 per serving and fresh soup sells for $ 2 per serving. Assuming that John has $10 to spend on soup, how will he allocate his budget between the two types of soup? Explain your answer by drawing John's budget line and indifference curves.

Solutions

Expert Solution

Answer: For canned soup (C) and Fresh soups (F)

=> x Units of C can be substituted by x units of F

Price of canned soup P_c =$1 per serving

Price of Fresh soup P_F =$2 per serving

Maximum budget for soups m= $10

The budget line formula here is:

10 = P_c * C + P_F * F

=> 10 = 1 * C + 2 * F

=> 10 = C + 2 F

=> C = 5 - 0.5 F

He will spend all $10 on canned soup. As he gets the same utility with consuming same quantity of goods, .i.e canned soups are perfect substitute of fresh soups. Here exists a corner solution, He will get the maximum utilization by consuming the maximum units of soups.

He can have 10 servings of canned soup within the given budget of $10, while he can only purchase 5 units of fresh soup in $10.

hence he will maximize his utility by spending $10 all on canned soup.

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Rahul Sunny answered 2 years ago

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