Question

David gets $90 per month as an allowance to spend any way he pleases. Because he likes only peanut butter and jelly sandwiches, he spends the entire amount on peanut butter (at $1 per ounce) and jelly (at $2 per ounce). Bread is provided free of charge by a concerned neighbor. David is a picky eater and makes his sandwiches only one way-- with exactly one ounce of peanut butter and two ounces of jelly. You can use increments of 10 on both axes.

1. Carefully draw and label any 3 accurate indifference curves. Label them U1, U2 and U3 such that U3>U2>U1.

2. Label the following two points in your graph: Bundle A (50 Jelly and 20 Peanut Butter) and Bundle B (30 Peanut Butter and 40 Jelly). Carefully explain whether David gets more satisfaction from Bundle A or Bundle B.

Answer 1

1.

Given that he prefers to consume 1 ounce of peanut butter with 2 ounces of Jelly.

Let consumption of peanut butter be x and let consumption of jelly be y. Therefore x:y=1:2.

Using this ratio we can derive the utility function as U=min(2x,y)

Therefore, taking utilities as 1, 2 and 3 we derive the following indifference curves- IC₁, IC₂ and IC₃ respectively.

2.

Given the following bundles,

A= (20,50)

B= (30,40)

We mark these bundles on the following graph with the corresponding indifference curve.

Therefore, we see that both the bundles lie on the same indifference curve with a utility of 40. We know that all the bundles lying on the same indifference curve provide the same level of satisfaction or utility. Therefore, the consumer derives equal utility from both the bundles and is indifferent towards them.