Marginal 20 utility of 18 cookies 6 14 Marginal utility of c

Marginal 20 utility of 18 cookies 6 14 Marginal utility of cookies 8 2 2 8 12 Quantity of cookies (number of packs) Marginal 12 utility of Smarties 10 Marginal utility of Smarties 6 2 0 3 5 6 Quantity of Smarties (number of boxes)

Solution

Given Joe\'s income and the price of smarties and cookies, his budget constraint is given by:

S + 2C = 16.

Given the above budget constraint, Joe can consume any of the below combination of smarties and cookies:

(0,8),(2,7)(4,6)(6,5)

[Note: He cannot consume integral values since packets cannot be 1.5 or 2.5. Also, he cannot consume for than 6 smarties or 10 cookies since his MU becomes negative after that]

Joe\'s marginal utility from curves for smarties and cookies are given in the diagram. Joe will consume at a point where his marginal utility from the consumption of the two commldities is maximized.

Thus, by consuming the bundle (0,8) with 0 smarties and 8 cookies, MU = 4.

At bundle (2,7) MU = 14

at (4,6) MU = 12

at (6,5) MU = 10

a

Thus, maximum utility is obtained at the bundle (2,7) .

He shoukd consume 2 smarties and 7 cookies.