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Jack's utility function is U(B,C)=B-C, where B = veggie burgers per week and C packs of cigarettes per week
Jack's utility function is U(B,C)=B-C, where B = veggie burgers per week and C packs of cigarettes per week. a) What is her marginal rate of substitution if veggie burgers are on the vertical axis and cigarettes are on the horizontal axis? b) Jack's income is $120, the price of veggie burger is $2, and that of a pack of cigarettes is $1. How many burgers and how many packs of cigarette does Jack consume to maximize her utility? Illustrate your answers in a graph.
Expert Solution
Answer a. MRS= MUc/MUb= -B/C
So, marginal rate of substitution= -B/C
Answer b. At optimal equilibrium level,
Slope of Indifference curve= Slope of budget line
Pc= $1 and Pb=$2.
-B/C= -Pc/Pb
-B/C=- 1/2
2B=C
Budget constraint
2B+C=120
C+C=120
2C=120
C*=60
B*=60/2=30
Serpil consumes 60 packs of cigarette and 30 burgers to maximize the utility.
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