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1. Consumer Behavior -- Suppose your fun (i.e. utility) depends on your consumption of cookies and chocolates: U(Cookies, Cho

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Answer #1

1.

U = cookies ^.5 * chocolates ^.5

So,

MU of cookies = .5*(chocolates/cookies)^.5

MU of Chocolates = .5*(cookies / chocolates)^.5

Price of cookie = $1

Price of chocolate = $2

At equilibrium

MU of cookies/Price of cookie = MU of Chocolates/Price of chocolate

.5*(chocolates/cookies)^.5 / 1 = .5*(cookies / chocolates)^.5 / 2

2*.5* (chocolates/cookies)^.5 = .5*(cookies / chocolates)^.5

2*chocolates = 1*cookies

The budget equation is:

10 = 2*chocolates + 1*cookies

or

10 = 1*cookies + 1*cookies

Cookies = 10/2 = 5

Chocolates = 1*5/2 = 2.5 chocolates

So, utility will be maximized, when 5 units of cookies and 2.5 units of chocolates are consumed.

Cookies 10 (2.5, 5) 2.5 5 Chocolates (Budget line at $10 income)

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