Q2 Ch 5 10 Bridget has a limited income and consumes only wi

Q2: Ch 5 (10%) Bridget has a limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Bridget’s utility, while the last pound of cheese added 40 units. Dr. C. Chen a. Is Bridget making the utility- maximizing choice? Why or why not? b. If not, what should she do instead? Why?

Q3: Ch 5 (10%)
Assume that Andy consumes two goods X and Y. His total utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of Xand Y are, respectively, $5 and $10.

a. If Andy is given $65 to spend, how many X and Y will he consume daily? Show your work.

b. If his budget increases to $110, what combination will the person consume? Show your work.

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Solution

2.

A.

Utility drawn per dollar from last unit of wine = 50/10 = 5 utils / dollar

Utility drawn per dollar from last unit of cheese = 40/4 = 10 utils / dollar

Here, marginal utility per dollar, for wine is not equal (it is less) to that of cheese, then Bridget is not making a utility maximizing choice.

B.

In this scenario, Bridget should consume more of Cheese and less of wine so that marginal utility of Cheese per dollar should be equal to the MU per dollar of wine. It will help to maximize the utility.

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