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Question: Scott derives utility from only two good, Muffins (M) and bagels (B). His utility function is U(M,B)=M*B. The marginal utility that he recieves from muffins (MUM) and bagels (MUB) are given as: MUM = B and MUB = M. Scott has an income of $20 & the price of muffin (PM) & bagels (PB) are both $2.
a. Write equation that characterizes Scott's budget constraint.
b. What quantities of M and B will maximize Scott's utility given the information above? What's his total utility at this bundle?
c. Graph Scott's budget line and the indifference curve with muffin on x-axis & bagels on y-axis. Indicate the point that maximizes Scott's utility?(Make sure to indicate intercept points on x & y axis)
d. Suppose the government decides to levy an excise tax of $1 per unit on bagels and the excise tax is fully passed onto consumers in form of $1 increase in price. What's Scott's budget constraint now that he is facing this tax?
e. Which consumption bundle would Scott choose now that this tax on bagel has been implemented? What's his total utility at this bundle?
f. How does Scott's total utility change after facing the tax?
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