Please see the attached file for full problem description.
Each day Paul, who is in third grade, eats lunch at school. He likes only Twinkies (T) and Orange Slice (S), and these provide him a utility of
Utility = U (T, S) =
Every day his mother gives him $1 to spend on lunch. Assume that it is possible to purchase fractional amounts of both the goods.
a. If Twinkies cost $0.10 each and Slice costs $0.25 per cup, what is his budget constraint? Write down the budget equation and draw the budget line.
b. Where does the budget line intersect (touch) the indifference curve for U = ?
c. Show different combinations of T and S that satisfy the budget constraint, give the corresponding utility value, and verify that the combination of T and S obtained in part b, in fact, maximizes Paul's utility.
<br><br>a) If Twinkies cost $0.10 each and Slice costs $0.25 per cup, what is his budget constraint? Write down the budget equation and draw the budget line:
<br><br> Budget constraint $0.10T + $0.25S = $1
<br><br> to draw the budget line: for example consider this two points A( T=0; S=4) and B(T=10; S=0) AND c(T=5, s=2)
<br><br>B) Where does the budget line intersect (touch) the indifference curve for U =10^1/2. To answer a question like this first, one should determine the TMS between T and S which is the point in which budget line is tangeant to the utility fonction. U't/U's=Price of T / price of S. (1/2*S^1/2*T^-1/2)/(1/2*T^1/2*S^-1/2) = $0.1/$0.25 After doing all the claculation we get S/T=0.1/0.25 which is S=0.4*T . we will now replace S in ...
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