Question (20 points) : Mr. Komer has a monthly income of 50 that he spends on two goods Meal (M) and Potatoes (P). His utility function is given by the equation; U(M.P) = 3MAP Sdag Wuch. edu a) (2 points) What is his marginal utility from Meal? What is his marginal utility from Potatoes?! Answer: 3, 2 b) (4 points) What is the Marginal Rate of Substitution of Meat for Potatoes? Draw a representative indifference curve for Mr. Krugman between Meat and Potatoes with Meat on the horizontal axis and Potatoes on the vertical axis and clearly label the end points of your indifference curve. Answer: WIRS - 1.5 c) (5 points) Now suppose the price of Meat is $2.5 a pound and the price of Potatoes is $2 a pound, Draw the budget line of Mr. Krugman. To maximize his utility what combination of Meat and Potatoes should Krugman choose? Show your answer diagrammatically and justify your answer by discussing it in terms of the marginal rate of substitution and price ratio. CUU Answer: only meat because MRS>price ratio = 5/4. d) (5 points) Now suppose the price of Meat rises to $5 a pound and the price of Potatoes is unchanged at $2 a pound. Draw the new budget line of Mr. Krugman. To maximize his utility what combination of Meat and Potatoes should Krugman choose? Show your answer diagrammatically. Answer: Price ratio is 2.5 now which exceeds the MRS. hence he will buy only Potatoes