D) From class lecture and Sapling Learning Homework: Suppose that Sam allocates
ID: 1107439 • Letter: D
Question
D) From class lecture and Sapling Learning Homework: Suppose that Sam allocates his income between milk and cereal. Milk costs $2.50 per gallon and cereal costs $5.00 per box. Sam has $50 per week to spend on these two goods. The following table shows Sam's preference for consumption bundles, as well as how Sam's marginal utility (MU) for milk and cereal, respectively, varies as consumption varies. Given the information provided here, how should Sam allocate his income between milk and cereal? | Cereal | MU Milk Cereal Milk MU 20 18 16 14 12 10 8 6 0 Sam should purchase the following, as this is his optimal consumption bundle: (Show your work) 135 120 105 90 75 60 45 30 8 6 13 15 8 2 9 16 12 10 Illustrate the budget constraint for Sam given the price of milk, cereal, and the optimum consumption bundle:Explanation / Answer
Answer:
Sam should allocate his income such that the marginal utility of the last dollar spent on milk is equal to the marginal utility of the last dollar spent on cereal.
AT equilibrium that is utility maximizing choice, MRS= Pm/Pc
where MRS = MUmilk/ MU cereal
Given that Pm =2.5 and Pc=5 ; price ratio = 0.5.
AT 4 units of milk, and 8 units of cereal MRS = price ratio.
Optimum bundle (4,8)
Budget constraint: if M is the units of milk and C is the number of cereals,
the budget constraint: 2.5 M + 5 C = 50
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.