3) Consider a consumer who decides on the optimal allocation between ice cream and pretzels. The consumer has an income of $1000. An ice cream costs $2 and the price of a pretzel is $1.

Illustrate ice cream on the horizontal axis and pretzels on the vertical axis.

a)Assume that the utility function is U=Ice Cream*Pretzels. Illustrate the optimal allocation between ice cream and pretzels. (Only graphical illustration required, no calculation required.)

Solution

b)Assume now that the utility function changes toU=Ice Cream. Illustrate the optimal allocation between ice cream and pretzels. (Only graphical illustration required, no calculation required.)