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Question 4: Picky Pete drags Indifferent Ian out for coffee at an upscale Italian cafe which sells only espresso (E) and biscotti (B). Picky Pete simply must have one biscotti for every espresso consumed, whereas Indifferent lan views espresso and biscotti as perfect substitutes. One of their utility functions is given by Umin E, B and the others by U-E+ B (a) Given the description, which utility function corresponds to which person? (b) Suppose the prices of the goods are (pe,pB)- (2,1) and Pete has allocated $12 for the outing while Ian brought only $4. Solve for each persons utility-maximizing bundle of espresso and biscotti (c) Draw a fully labeled diagram illustrating Petes budget constraint, his optimal bundle, and an indifference curve representative of his utility at his optimal bundle. Indicate how much utility Pete obtains. (d) Do the same for lan.

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on- Picky Pte ds espreso (E) and hiscot CB) Conside9 given Problem heme Pkkyrte, een- hust have one Espreso ual rrorotion S qtvenBBiscotticihu Suu Figet constrcaint eee nction geven by ,1 U = min (E, B) sRe opimu consumption bund les ae ven bj on u given by U = E ene Lenwt devote is entire ihCome on tRe goo tRe optinum Consump-hin undleo gien byB-Biscotti Petes utility function and the budget line 2E + B= 12, U= min(E, B). E1 в-4 81 E-Espressomum bungle tRe inteaction point efroeen tRe udget oingConsider the following fig BBIscotti Lens utility function and the budget line A2t Len. Nouo 3ase SLl cheaper) to E -) Leny len . esje

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