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A person has utility function U = AB for goods A and B. Prices of the goods are PA = $5 and PB: $1 per
A person has utility function U = AB for goods A and B. Prices of the goods are PA = $5 and PB: $1 per unit, with income Y = $500 per month. Marginal utilities are: MUA= Band MUB =A a. Graph the budget constraint (with A on the horizontal axis, B on vertical axis.) Document the intercepts (numerically) and slope of constraint. b. Calculate the utility-maximizing choices of goods A and B. c. The person is offered the following pricing scheme for good A: They can pay $250 per month for a club membership where good A is sold that allows them to consume as much of good A as they like without paying a per unit $5 price (i.e., PA = 0). Compare this pricing option to where they pay the regular $5 per unit price (as in part a). Which pricing option would they prefer (to maximize their utility)? Explain
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