Elmira has a monthly income of $200 that she allocates between two goods: Beef (B) and Potatoes (P). Beef costs $6 per pound while Potatoes cost $1 per pound. Elmira’s utility function is given by: U(B, P) = 2B + P Assume that both Beef and Potatoes are finely divisible goods (so your answer may or may not be a whole number). This question contains 6 parts, (a)-(f)) (a) Write down the equation for Elmira’s indifference curves. (Assume Beef is measured on x-axis and Potatoes on y-axis) (b) Depict Elmira’s budget line graphically and mention its slope. (Again, assume Beef is measured on x-axis and Potatoes on y-axis) (c) Illustrate some indifference curve(s) for Elmira.
Question 1
Elmira has a monthly income of $200 that she allocates between two goods: Beef (B) and
Potatoes (P). Beef costs $6 per pound while Potatoes cost $1 per pound. Elmira’s utility
function is given by: U(B, P) = 2B + P Assume that both Beef and Potatoes are finely
divisible goods (so your answer may or may not be a whole number). This question
contains 6 parts, (a)-(f))
(a) Write down the equation for Elmira’s indifference curves. (Assume Beef is measured
on x-axis and Potatoes on y-axis)
(b) Depict Elmira’s budget line graphically and mention its slope. (Again, assume Beef is
measured on x-axis and Potatoes on y-axis)
(c) Illustrate some indifference curve(s) for Elmira.
(d) Find MRSBP . Do Elmira’s preferences have a diminishing Marginal Rate of Substitution?
(e) What combination of Beef and Potatoes should Elmira buy to maximize her utility?
(f) Determine Elmira’s utility at the utility maximizing choice.
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