You are organizing a group of people to visit a state park for a day trip. You h

Question

You are organizing a group of people to visit a state park for a day trip. You have to rent cars and hire drivers for the transportation. If you rent C cars, and hire D drivers, your utility function is U=min(C, D), because you have to find one driver for one car. Suppose car rental price is $50 per day, and driver’s salary is $100 per day. Your budget is $1200. Draw the indifference curves and budget constraint. How many cars should you rent and how many drivers do you hire to maximize your utility?

Explanation / Answer

Indifference curve will be L-shaped.

Since to maximise utility = C=D

Budget constraint 50C + 100D = 1200

We can write it as 150 C = 1200

C = 8 = D

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