Remember Charlie from Chapter 3? Charlie consumes apples and bananas. We had a look at two of his indifference curves. In this problem we give you enough information so you can find all of Charlie’s indifference curves. We do this by telling you that Charlie’s utility function happens to be U (xA, xB) = xAxB.
(a) Charlie has 40 apples and 5 bananas. Charlie’s utility for the bundle 40, 5) is U (40, 5) = ______ The indifference curve through (40, 5) includes all commodity bundles (xA, xB) such that xAxB = ____. So the indifference curve through (40, 5) has the equation xB =200 xA. On the graph below, draw the indifference curve showing all of the bundles that Charlie likes exactly as well as the bundle (40, 5).
(b) Donna offers to give Charlie 15 bananas if he will give her 25 apples. Would Charlie have a bundle that he likes better than (40, 5) if he makes this trade? _____. What is the largest number of apples that Donna could demand from Charlie in return for 15 bananas if she expects him to be willing to trade or at least indifferent about trading? _____.