Q1) No (1)

𝑀𝑈𝑏 𝑀𝑈𝑑
This is because the marginal utility per rupee spent is higher for books than for DVDs, i.e; >
𝑃𝑏 𝑃𝑑

b= Books, d=DVDs. (1)

This implies that Saurabh could increase his utility by spending more on the books and less on the DVDs
(1)

Or, Saurabh would continue to purchase more of books till marginal utility of one rupee spent on books
𝑀𝑈𝑏 𝑀𝑈𝑑
is equal to marginal utility of one rupee spent on DVDs. i.e., =
𝑃𝑏 𝑃𝑑

Q2) a) Utility function: U= v+3c (1)

b)

(1+1)

c)

𝑀𝑈𝑐 3
d) To obtain consumption basket we need to calculate 𝑀𝑅𝑆𝑐,𝑣 = = =3 (1/2)
𝑀𝑈𝑣 1

𝑃𝑐 3
and slope of B.L. = = (1/2)
𝑃𝑣 2

𝑃𝑐
From the above calculations it follows that, 𝑀𝑅𝑆𝑐,𝑣 >
𝑃𝑣

𝑀𝑈𝑐 𝑀𝑈𝑣
Which implies > (Marginal utility of spending one rupee on chocolate ice cream is higher
𝑃𝑐 𝑃𝑣
compared to marginal utility of spending one rupee on vanilla) (1/2)

Hence Bidisha will spent more on chocolate ice cream and less on vanilla ice cream
 She will continue to substitute chocolate ice creams for vanilla ice creams,( moving along the Budget
line) until she reaches the corner basket A. (1/2)

Optimal consumption basket A = (c,v) = (20,0) (1)

Q3(a) Zero, 𝑀𝑅𝑆𝐼,𝐶 =0 (1)

(b) She will give up all but one of her excess cones in order to get an extra scoop of icecream, i.e;
𝑀𝑅𝑆𝐼,𝐶 ->infinity (1)

(c) Utility fn: U(I,C) = min( I, c) (1.5)

(1.5)

Q4) a (1)

Q5) Optimal choice combination,

Maximize U(F, C) = FC (A)

Subject to B.L: 10F+ 20C= 120 (B)

At the optimal point,

𝑀𝑈𝑓 𝑃𝑓
= (1)
𝑀𝑈𝑐 𝑃𝑐

C/F = 10/20

F= 2C

Substituting F=2C in equation (B) we obtain 10(2C)+ 20C = 120. Solving for C we obtain the optimal
consumption of clothing as

C* = 3 .

Now, F* = 2C* = 6

Thereforeoptimal choice combination is given by (F*, C*) = (6,3). Refer to the diagram below for a
graphical representation. (1)