Questions:

Adam buys smoothies and sushi. The price of a smoothie is $5 and the price of sushi is $1 per piece. Adam has an income of $20.

(a) Draw a graph of Adam's budget line with smoothies on the x-axis (i.e. horizontal axis). (b) What is the opportunity cost of Adam buying a smoothie?(c) Draw a set of indifference curves, showing the point at which Adam will maximise his utility. Explain why these indifference curves have they shape that they do.(d) What is the relationship between the marginal utility of smoothies and the marginal utility of sushi at this point?

Now suppose Adam's income increases to $40, with the price of smoothies and sushi remaining unchanged.

(e) Draw a new diagram showing the effects of this situation. If Adam continues to buy the same quantity of smoothies as when his income was $20, how many pieces of sushi will he buy when his income increases to $40?