Johnny continues to consume burgers and steaks. His utility function is U(xB; xS

ID: 1192782 • Letter: J

Question

Johnny continues to consume burgers and steaks. His utility function is

U(xB; xS) = xBxS. The price of burgers is $1, the price of steak is $2, and

his income is $40 a day.

Remember Johnny, who was buying burgers and steaks? Johnny has 40

burgers and 5 steaks.

a) What is the level of Johnny's utility for the bundle (40,5)?

b) Write the formula for the indierence curve going through (40,5).

Donna oers to give Johnny 15 steaks if he will give her 25 burgers.

c)Would Johnny have a bundle that he likes better than (40,5) if he made

this trade?

d) What is the largest number of burgers that Donna could demand from

Johnny in return from 15 steaks if she expects him to be willing to trade or

at least be indierent about trading?

a) Utility(40,5) = 40*5 = 200

b) Indifference curve passing through (40,5) => xBxS = 200

c) Now the consumption bundle would be (15, 20)

utility(15,20) = 300

(15,20) is preffered over (40,5) as it gives him higher utility.

d) MUb/MUs = Ps/Pb

Xs/Xb = 2

If Xs = 20, Xb = 10

Maximum Donna can demand in return for 15 steaks is 30 burgers

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