1. Alex's preferences for bagels and wine can be isolated and examined. Assume that Alex's budget is $200. Bagels cost $2.00 each and wine costs $10.00 per liter. Assume that Alex spends all of his income on bagels and wine in order to maximize his total utility.
a) Write the equation for his budget line. What is the slope of the budget line and what does it mean? Draw the budget line. Use the X-axis for bagels and the Y-axis for wine.
b) Draw Alex's preferences map and superimpose the budget line. Label Alex's utility-maximizing combination of bagels and wine as point "A." What is meant by the "utility-maximizing combination of bagels and wine?"
c) Now consider Sally; Sally is currently spending her entire budget on bagels. She purchases no wine.
d) Draw Sally's indifference curves and explain her consumption choices in term of marginal utility.
e) Consider alternative strategies wine manufacturers could use to target Sally and consumers like her (i.e. lowering price of wine, advertising, free samples).