### Finding the utility maximizing bundle

##### Reference no: EM131000005

1. Jennifer has \$10 to spend on tomatoes and cheese. The price of a pound of tomatoes is \$2 and the price of a pound of cheese is \$4. She has found her utility-maximizing bundle at 2 pounds of tomatoes and 1.5 pounds of cheese. Suppose Jennifer's income falls to \$8 and the price of tomatoes falls to \$1. The price of cheese remains the same. Jennifer is considering a bundle of zero units of tomatoes and 2 units of cheese. What is your advice?

2. Kelli likes to bake cookies and doesn't care whether she uses corn or safflower oil in her recipes. To her, they provide the same function and the same taste in her cakes and cookies. What do Kelli's indifference curves look like for corn oil and safflower oil? What is her tangency condition when it comes to finding the utility maximizing bundle?

1. Suppose that the price of good X is \$10, the price of good Y is \$20, and our income is \$100.

a. What is the maximum amount of good X you can buy? What about good Y?

b. Write down your budget constraint and solve it for Y.

c. Sketch a graph of your budget constraint.

2. Now suppose that the prices stay the same, but your income increases to \$200.

a. Write down your new budget constraint and solve it for Y.

b. Sketch a graph of your old budget constraint and the new one on the same graph.

3. Now suppose your income is still \$100, the price of X is still \$10, but the price of good Y increases to \$50.

a. Write down your new budget constraint and solve it for Y.

b. Sketch a graph of your old budget constraint and the new one on the same graph.

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