Question
Frodo has an income of $60, which he can spend on two goods; Gandalf's fireworks or Green Dragon ale.Both are normal goods to him; each
Frodo has an income of $60, which he can spend on two goods; Gandalf's fireworks or Green Dragon ale.Both are normal goods to him; each firework costs $8, and each flagon of ale costs $4.For each of the following situations, decide whether this is Frodo's optimal consumption bundle, and show how you arrived at that conclusion.If the bundle isn't optimal, what should Frodo do to improve his overall level of utility?(12 marks - 4 marks each)
a)Frodo is thinking about buying 3 fireworks and 9 flagons of ale.Frodo's marginal utility of the second firework is 30, and his marginal utility of the 15thflagon of ale is 15.
b)Frodo is thinking about buying 4 fireworks and 7 flagons of ale.At that bundle, the additional satisfaction he gets from the last firework is equal to the additional satisfaction he gets from the last flagon of ale.
c)Frodo is thinking about buying 2 firework and 10 flagons of ale.At that bundle, his marginal utility from the second firework is two times larger than his marginal utility of the 10th flagon of ale.
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