Question

In: Economics

The consumer's budget constraint is $6 = 2G + 2P, where G is packs of gum...

The consumer's budget constraint is $6 = 2G + 2P, where G is packs of gum and P is bags of pretzels. The consumer's utility function is U = G^0.5P. The utility-maximizing bundle consists of _____ packs of gum and _____ bags of pretzels.

a) 8;1

b) 4;4

c) 1;2

d) 8;2

Expert Solution

We know that Utility maximizing bundle is where the ratio of the marginal utilities of the two goods is equal to the ratio of their prices

In this case

MUG / MUP = PG/PP

PG/PP = 2/2 = 1

MUG = 0.5P*G^(-1/2)

MUP = G^(1/2)

MUG/MUP = (0.5P*G^(-1/2)) / (G^(1/2) = 0.5P/G

If MUG/MUP = PG/PP

Then 0.5P/G = 1, and hence 0.5P = G or P = 2G

Since budget line is $6 = 2G+2P

$6 = P+2P = 3P, hence P = 6/3 = 2

And G=0.5P = 0.5*2 = 1

C. is the right answer

Rahul Sunny answered 2 years ago

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