Question

Question 1) Suppose we study consumer Nathan, who has a monthly income of $120 and derives utility from consuming burritos and video games at $10 per burrito and $30 per video game. Below is a list of all consumption bundles (QB, QVG) he is just able to afford, and their associated marginal utility data. Now please perform marginal analysis to determine Alex’s best bundle.

QB	MUB	MUB/$	QVG	MUVG	MUVG/$
0	-	-	4	0
3	150		3	150
6	100		2	300
9	50		1	450
12	0		0	-	-

Question 2) Write Nathan's budget constraint equation (in the form of pBQB+pVGQVG=m).

Question 3) Draw his budget line on a QVG-QB diagram with QB on the horizontal axis.

Question 4) The table below lists three utility levels Nathan could reach and various (QB, QVG) consumption bundles that he would be indifferent about at each utility level. use this information to draw three Indifference Curves.

U1 = 400		U2 = 600		U3 = 1000
QB	QVG	QB	QVG	QB	QVG
8	1	12	1	20	1
4	2	6	2	10	2
2	4	4	3	5	4
1	8	3	4	4	5
		2	6	2	10
		1	12	1	20

Question 5) Now put together Nathan's Indifference Curves and his Budget Line. Which point is his best consumption bundle? Why?

Answer 1

Question 1

According to the marginal utility analysis, the best bundle for the consumer is one where the marginal utility of one good relative to its price is equal to the marginal utility of the other good relative to its price.

Algebrically MU_B/P_B=MU_VG/P_VG

Therefore we incorporate the other two colunms in the following table.

From the table above we can see that the condition MU_B/P_B=MU_VG/P_VG at the bundle where he is consuming 6 units of burrito and 2 units of video game.

Therefore, best bundle = (6,2)

Question 2

The budget constraint equation is given in the form P_BQ_B+P_VGQ_VG=M

In this case M = $120, P_B=$10, P_VG=$30

Therefore the following budget constraint can be derived

10Q_B+30Q_VG=120

Question 3

His budget line can be seen in the above graph as AB. If he consumes none of Burritos, he is able to consume 4 video games and if he consumes none of the video games, he is able to consume 12 burritos.

Question 4.

Question 5.

After combining his budget line and indifference curves, we see that his budget line intersects the utility function 2 at u=600. This utility curve is tangent to the budget line at the point of intersection and therefore this is his best bundle i.e. (6,2).

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