Marvelous Marvin spends his money on muffins (m) and a composite good (c) (whose price you may assume is $1 throughout this problem). Marvin's utility is U = m + c and his income (I) is 20.

1. Suppose the price of muffins (pm) is 2. Draw Marvin's budget constraint and the highest indifference curve he can reach.

2. What is Marvin's optimal bundle?

3. Suppose that Marvin has the option of joining a muffin club for a membership fee of $10. Club members can purchase muffins for $0.40 each. Draw Marvin's budget constraint if he joins the club. Draw the highest indifference curve he can reach.

4. What is Marvin's optimal bundle (when he is a member of the club)?

5. Will Marvin choose to join the club? Why?

 

Posted Date: 3/1/2013 6:44:18 AM | Location : United States

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