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Suppose that Maggie cares only about chai and bagels
Suppose that Maggie cares only about chai and bagels. Her utility function is U= CB, where C is the number of cups of chai she drinks in a day, and B is the number of bagels she eats in a day. The price of chai is $3, and the price of bagels is $1.50. Maggie has $6 to spend per day on chai and bagels.
- State the objective function
- State the constraint
- Solve for MUC and MUB and state if utility function exhibits diminishing MU for each good
- Interpret the value of your MUC and MUB at C=2 and B=6
- Solve for MRSCB and state if the utility function exhibits diminishing MRS
- Interpret the value of your MRSCB if P=2 and S=1
- Write down the optimality condition. Express it using the utility function and prices given above.
- What is the economic meaning of the optimality condition applied specifically to the chai and bagels. Equality of slopes of IC and BL are not acceptable answers- these are not economically relevant terms
- Solve for optimal level of chai and bagels.
- Draw your optimal solution by drawing an IC (convex one) and BL, and make sure you label your optimal levels of B and C as well as the intercepts of your BL
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