Answer to Question #147272 in Economics of Enterprise for D

Question

has a monthly income of $200 that she allocates among two goods: meat and potatoes.
a. Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget constraint.
b. Suppose also that her utility functio

Answer 1

Solution to question 147272

(a) Draw a budget constraint

First, form a budget constraint equation for meat and potatoes as shown below;

Income to be spent = $ 200

Price of products to be purchased are $ 4 and $ 2 for meat and potatoes respectively.

Quantity/units of meat and potatoes are unknown, we therefore assume they are x and y units respectively.

Equation will combine all the above and will be in form of:

Cost of meat + Cost of potatoes ≤ Monthly income(substitute)

4x+2y≤ $ 200

When x=0 units, y will be 100 units and when y=0 units, x will be 50 units (Use this points to draw the budget constraint)

Budget constraint in form graphical representation (Drawn and extracted from excel)

 

(b) Suppose that her utility function is, at what point will there be maximized utility.

Along the budget line, any combination of meat and potato products will give maximum utility.