Question

Jane spends 150 dollars per month on coffee and buns at the cafeteria. A cup of tea costs 15 dollars and a bun costs 10 dollars.

a) Write the equation for Jane’s cafeteria budget constraint and draw it in a diagram. (15 points)

b) Assume that Jane never drinks coffee without eating one bun, and never eats buns without drinking coffee. How much of each will she consume? Draw the graph of her indifference curves.

Answer 1

a)

$P_{coffee}\times Q_{coffee}+P_{Bun}\times Q_{Bun}$

$150C+10B=150$

b) Coffee and bun are perfect complements as Jane never drinks coffee without Bun and never eats Bun without coffee.

$U(C,B)=min(C,B)$

$C=B$

Put $C=B$ in budget equation

$15B+10B=150$

$25B=150, B=6, C=6$

6 units of buns and 6 units of coffee will be consumed by Jane.