Suppose Bethany buys both CDs and video games. The price of a CD is $15 and the price of a video game is $30.

Suppose Bethany buys both CDs and video games. The price of a CD is $15 and the price of a video game is $30. Suppose that given Bethany’s planned expenditures, she receives 900 utils from her last planned purchase of CDs and 1,200 utils from her last planned purchase of video games. Is she at the optimal combination of CDs and video games? Explain. If not, explain how she should alter her consumption bundle. (Hint: use Marginal utilities and prices in your answer). Also, graph a utility curve and budget line that might describe the situation in this problem. Explain graph.

Solutions

Expert Solution

At the Optimal combination, MUx/Px=MUy/Py due to law of equi marginal utility.

MU/P for CDs= 900/15= 60

MU/P for Video games= 1200/30= 40

Since 60>40,

To equate the MU/P for both goods, consumer should increase consumption of CDs and decrease consumption of Video games.

Currently the consumption is at point A.

The optimal bundle of consumption is at O.

Rahul Sunny answered 2 years ago

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