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 can 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

The answer is C. How is this so?

Explanation / Answer

If he buys only Avocados, with an income of 80, he can buy 40 avocados (=80/2)

Now, the cost of 40 Avocados are = 40x0.5= 20 (considering joining doscount grocery)

In addition to this he can pay $40 to join the discount grocery resulting in total cost of $20+$40=$60

AS THERE IS NO MENTION OF THE COMPOSITE GOODS, WE CAN CONSIDER IT TO BE UNCHANGES AND WITH AN ASSUMPTION OF SAVINGS OF $20 ($80-$60), HE SHOULD JOIN DISCOUNT GROCERY

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