Question
Gabe has a utility function given by = 2(^0.5)(^0.5), where M is the number of bottles of milk he drinks and C is the number
Gabe has a utility function given by = 2(^0.5)(^0.5), where M is the number of bottles of milk he drinks and C is the number of teething crackers he eats.1 Milk costs $2 per bottle and crackers costs $4 each; Gabe has a total of $8 to spend on milk and crackers.
Write an equation for Gabes marginal utility from eating one cracker.
Write an equation for Gabes marginal utility from drinking one bottle of milk.
Draw your solution to e on the axes above. Be sure to label your diagram.
Now suppose the price of crackers falls to $2 each. Draw the new solution on the same set of axes. You do not need to solve for the exact new quantity Gabe consumes, just show how his consumption would change. Show both the income and substitution effects.
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