Connie has a monthly income of $200 that she allocates among two goods: meat and potatoes.
a. Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget constraint.
b. Suppose also that her utility function is given by the equation U(M, P) = 2M = P. What combination of meat and potatoes should she buy to maximize her utility?
c. Connie’s supermarket has a special promotion. If she buys 20 pounds of potatoes (at $2 per pound), she gets the next 10 pounds for free. This offer applies only to the first 20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes) are still $2 per pound. Draw her budget constraint.
d. An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket ends its promotion. What does her budget constraint look like now? What combination of meat and potatoes maximizes her utility?