Alex has an income of I = 80 and decides between buying Avocados (A) and a compo

Question

Alex has an income of I = 80 and decides between buying Avocados (A) and a composite good (M) with PM = 1. Avocados normally cost $2. Alternatively, he cay pay $40 to join the discount grocery in which case Avocados only cost $0.50. What should he do?

(a) He should not join the discount grocery.

(b) Based on the information given, it could be optimal for him to join, and could be optimal for him to not join.

(c) He should join the discount grocery

(d) The utility function is needed to determine.

Please show work

Explanation / Answer

d. the utility function is needed to determine what Alex should do.

The budget constraint without joining the discount grocery is M + 2A = 80

The budget constraint if he joins discount grocery is M + 0.5A = 40

Whether the reduced price of avocados increases his utility depends on how much he values them, which can only be known if the utility function is given. In the first scenario, the maximum M that can be consumed is 80. In the second scenario, maximum M is 40. If Alex values M higher than A and wants to consume more than 40 units, he will be unable to after joining the grocery and thus his utility would decline.

So whether joining the discount grocery benefits Alex depends on the utility function.

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