Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Matt considers Butter (B) and Sour Cream (S) as substitutes. His utility function has the form u(B, S) = B + S, where > 0.

Matt considers Butter (B) and Sour Cream (S) as substitutes. His utility function has the form u(B, S) = B + S, where > 0. Suppose the price of Butter is PB = 3, the price of Sour Cream is PS = 2, and Matt has an income of M = 100 dollars to spend between Butter and Sour Cream.

(a) In a well-labeled diagram, draw Matt's indifference map, putting Butter in the x-axis and Sour Cream in the y-axis. Make sure to indicate the direction in which the indifference curves increase.

(b) In a well-labeled diagram, draw Matt's budget set indicating the intercepts with the axes and the slope of the budget line.

(c) Obtain the Marginal Rate of Substitution between Butter and Sour Cream. What would happen to the MRS if Matt doubles his consumption of Butter and Sour Cream?

(d) Obtain Matt's optimal bundle when: - (i) > 3/2 (ii) < 3/2 (iii) = 3/2

(e) Now, suppose that the price of butter changes, whereas the price of the sour cream and Matt's income remain the same. The new price of Butter is P B = PB. What is the new Matt's optimal bundle? Does it depend on the value of ?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations Of Global Financial Markets And Institutions

Authors: Frank J. Fabozzi, Frank J. Jones, Francesco A. Fabozzi, Steven V. Mann

5th Edition

0262039540, 978-0262039543

More Books

Students also viewed these Economics questions

Question

How to Construct a Stem and Leaf Plot

Answered: 1 week ago