Sub: Economics Topic: Micro Economics
Utility maximization choice with current income & pricesof two goods - wine & cheese
Bridget has limited income and consumers only wine and cheese; her currentconsumption choice is four bottles of wine and 10 pounds of cheese. Theprice of wine is $10 per bottle, and the price of cheese is $4 per pound. Thelast bottle of wine added 50 units to Bridget’s utility, while the last pound of cheese added 40 units.a. Is Bridget making the utility maximizing choice? Why or why not.b. If not, what should she do instead.
Part aWe assume well behaved preference ordering for Bridget, i.e. a concaveutility function and hence convex to the origin Indifference curves.Let Marginal Utility of wine be MUwLet Marginal Utility of cheese be MUcApplying the Ordinal approach to consumer utility, the MRS = (MUw/MUc) The budget constraint of Bridget isPwQw + PcQc=M
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