Question

. A perfect “Tequila Sunrise” requires 100 grams of tequila per 2 parts of orange juice (fresh squeezed). pt is the price of 100 grams of tequila and po is the price of an orange. Ingrid’s budget for drinks is $100 (she wants to spend the entire $100). How many Tequila Sunrises will Ingrid consume? (Illustrate your answer with a graph.)

Answer 1

The prefect tequila requiring 100 grams of tequila and 2 parts orange point towards the fact that tequila and oranges are compliment goods. If T represents 100 grams of tequila and O represents 1 part orange (or one orange), then the Ingrid's utility function looks like: min{T, 2O} . For she consumes 100 grams of orange and 2 oranges together.

Let her budget constraint be: Pt*T + Po*O = 100

(It follows the budget constraint equation Price of 1*Quantity of 1 + Price of 2 * Quantity of 2 = Income)

The information is depicted in the graph below:

This is the various indifference curves of Ingrid for Tequila and Orange.

The budget line is shown as follows:

The blue line shows the budget line. Note that for any slope of the budget line, the optimum point of consumption will be at the kink of the highest indifference curve. That is no matter what the prices are, Ingrid will consume at the point where the highest possible indifference curve's kink touches the budget line,

(Rotate the budget line to see that the optimum will always be at the kink . This is shown below).

Therefore at the kink T = 2O. Putting this value in the budget line Pt*T + Po*O = 100 :

=> Pt*2O + Po*O = 100

=>O*(2Pt + Po) = 100

=> O = 100/ (2Pt + Po)

Hence T = 2O = 2*100/ (2Pt + Po)

=> T = 200/(2Pt + Po)

Therefore for given prices Pt and Po, Ingrid consumes 200/(2Pt + Po) of Tequila and 100/(2Pt + Po) of oranges.