maddy is a single mom with a weekly budget of $100. She can spend her weekly income on food and diapers for her son. Price of food is $1 and price of a diaper is 50 cents. Her son needs at least 5 diapers a day, therefore she must purchase at least 35 diapers weekly. maddy utility function is U (f, d) = f 0.9d0.1, where f and d represent quantity of food and diapers, respectively. Part a Find Jennifer’s optimal consumption bundle. Make sure to draw her budget constraint and indifference curves and clearly demonstrate your solution. Part b maddy uncle Sam, who is aware of her financial troubles, offers to help her out. Specifically, he offers to pay half of her weekly diaper expenses. How many diapers maddy would buy now? Again, demonstrate your solution both graphically and analytically.
maddy is a single mom with a weekly budget of $100. She can spend her weekly
income on food and diapers for her son.
is 50 cents. Her son needs at least 5 diapers a day, therefore she must purchase
at least 35 diapers weekly. maddy utility function is U (f, d) = f 0.9d0.1,
where f and d represent quantity of food and diapers, respectively.
Part a
Find Jennifer’s optimal consumption bundle. Make sure to draw her budget
constraint and indifference
Part b
maddy uncle Sam, who is aware of her financial troubles, offers to help her
out. Specifically, he offers to pay half of her weekly diaper expenses. How
many diapers maddy would buy now? Again, demonstrate your solution both
graphically and analytically.
Consumer theory is referred to the study of how an individual decides on spending their wealth on the basis of their preferences or choices and budget constraints. The theory states how people make choices depending on their income they receive along with the price of the commodities.
Budget constraint can be defined as the total amount of goods and services that one can afford with the current budget the person has. It is an illustration of the range of choices that are available to the individuals with the given budget.
Budget constraint is a representation of the possible combinations of goods and services that the individual is able to buy provided the price of the goods are within the boundaries of the income of the consumer. The concept of budget constraint along with preference mapping is used in consumer theory as tool that can examine the parameters for a consumer choice.
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