Please find the attached photo, 3. Joel has an income of $96, which he can spend on two (normal) goods: movies and pizzas. Each moviecosts $12 and each pizza costs $8.(a) Joel is considering buying bundle A, which is 3 movies and 5 pizzas. At that bundle, his marginalrate of substitution is 3 pizzas for 2 movies. Is the proposed bundle Joel's optimal consumptionbundle? If not, explain whether and why Joel buy more or fewer of each good to increase hisutility.(b) Illustrate consumption bundle A on a graph. If A is not the optimal bundle, also illustrate theoptimal bundle (labeled B) on the same graph. Be sure to include and label all relevant lines,curves, and points.

Total expenditure for Bundle A = Joel's remaining income after considering the Bundle Given Joel's…

Answered: Joel is considering buying bundle A,…

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 find the attached photo,

3. Joel has an income of $96, which he can spend on two (normal) goods: movies and pizzas. Each movie
costs $12 and each pizza costs $8.
(a) Joel is considering buying bundle A, which is 3 movies and 5 pizzas. At that bundle, his marginal
rate of substitution is 3 pizzas for 2 movies. Is the proposed bundle Joel's optimal consumption
bundle? If not, explain whether and why Joel buy more or fewer of each good to increase his
utility.
(b) Illustrate consumption bundle A on a graph. If A is not the optimal bundle, also illustrate the
optimal bundle (labeled B) on the same graph. Be sure to include and label all relevant lines,
curves, and points.

Expert Solution

Step 1: Question (a)

Total expenditure for Bundle A = $equals space left parenthesis 3 space m o v i e s space asterisk times space $ 12 divided by m o v i e right parenthesis space plus space left parenthesis 5 space p i z z a s space asterisk times space $ 8 divided by p i z z a right parenthesis space equals space $ 36 space plus space $ 40 space equals space $ 76$
Joel's remaining income after considering the Bundle $A space equals space $ 96 space minus space $ 76 space equals space $ 20$
Given Joel's marginal rate of substitution (MRS) is 3 pizzas for 2 movies, this implies that he is willing to give up 3 pizzas to consume 2 more movies, or in other words, he values 2 movies as much as 3 pizzas.
The combined cost of 2 movies is $24 and 3 pizzas is $24 as well, thus matching his MRS.

To determine whether this bundle is optimal, we need to check if his MRS matches the price ratio. The price ratio of movies to pizzas is $12/$8 = 1.5. This means that for every additional movie Joel consumes, he has to give up 1.5 pizzas given the prices.

However, his MRS (3 pizzas for 2 movies) means he's willing to give up 1.5 pizzas for each movie, which matches the price ratio. This implies that Bundle A is on its optimal consumption point and thus is optimal.

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