Please answer carefully and explain in as much detail as possible. Andrea has a budget of £21 to spend on toothbrushes and tooth paste. Hedoes not receive any utility from owning a toothbrush, but for the consumptionof every tube of tooth paste he gains a utility of 2 utils – but only if he owns atooth brush. Without a tooth brush, Andrea gains no utility from consumingtooth paste. In addition, after consuming 10 tubes of tooth paste, a toothbrushneeds to be replaced, i.e., Andrea needs to buy a new one. The current priceof tooth brushes on the market is £5 and the current price for tooth paste is £1per tube. Assume that Andrea aims to maximise consumer surplus.Find Andrea's income-consumption curve for tooth paste tubes for incomesbetween £0 and £21, assuming a price of £1 per tube.

Answered: Find Andrea's income-consumption curve…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please answer carefully and explain in as much detail as possible.

Andrea has a budget of £21 to spend on toothbrushes and tooth paste. He
does not receive any utility from owning a toothbrush, but for the consumption
of every tube of tooth paste he gains a utility of 2 utils – but only if he owns a
tooth brush. Without a tooth brush, Andrea gains no utility from consuming
tooth paste. In addition, after consuming 10 tubes of tooth paste, a toothbrush
needs to be replaced, i.e., Andrea needs to buy a new one. The current price
of tooth brushes on the market is £5 and the current price for tooth paste is £1
per tube. Assume that Andrea aims to maximise consumer surplus.
Find Andrea's income-consumption curve for tooth paste tubes for incomes
between £0 and £21, assuming a price of £1 per tube.

Expert Solution

Step 1

The ICC (income-consumption curve) is a locus of all points that shows various consumption bundles consumed at different income levels.

The goods – toothbrush (y) and tooth paste (x) are perfect complements such that the individual consumes them in a fixed proportion which is 10:1 in this case. Here MRS is not defined and the equilibrium occurs at the kink of IC curve where it is tangent with the budget line.

In case of perfect complements, the ICC is a straight line through origin and passes through all the tangency points of IC and the budget line. This shows that same combinations of goods are consumed irrespective of prices and income.

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