Sylvia’s utility function over waffle fries, F, and frozen yogurt, Y is given by U = 2 ∗ F ∗ Y. Her marginal utility from waffle fries is MUF = 2Y, and her marginal utility from frozen yogurt is MUY= 2F. A pack of frozen waffle fries sells for $4. The price of a cup of frozen yogurt is $6. Sylvia has a budget of $120 to allocate to these items each month. a) For Sylvia’s utility functions above, draw a set of indifference curves showing utility levels U = 20, U = 30, and U = 40 b) What is the equation for Sylvia’s budget line? Draw it (with frozen yogurt –Y– on the vertical axis), and label the slope and intercepts. c) What is Sylvia’s marginal rate of substitution?
Sylvia’s utility function over waffle fries, F, and frozen yogurt, Y is given
by U = 2 ∗ F ∗ Y. Her
utility from frozen yogurt is MUY= 2F. A pack of frozen waffle fries sells for $4. The price
of a cup of frozen yogurt is $6. Sylvia has a budget of $120 to allocate to these items each
month.
- a) For Sylvia’s utility functions above, draw a set of indifference
curves showing
utility levels U = 20, U = 30, and U = 40
- b) What is the equation for Sylvia’s budget line? Draw it (with frozen yogurt –Y– on
the vertical axis), and label the slope and intercepts.
- c) What is Sylvia’s marginal rate of substitution?
- d) If Sylvia maximizes her utility, how much of each food should she consume? Solve
for her optimal bundle. Show how to determine this bundle on a diagram using
indifference curves and a budget line.
- e) Briefly explain if each of the four conditions of the utility-maximizing behavior is
satisfied with the bundle you have obtained in (d).
- f) Now suppose that Sylvia’s monthly waffle fries and frozen yogurt is $180? Solve
for her optimal bundle. Show how to determine this bundle on a diagram using
indifference curves and a budget line.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 8 images
