Question

Helen's preferences over cds (c) and sandwiches (s) are given by u(s,

Answer 1

The fact that Helen’s indifference curves touch the axes should immediately make you want to check for a corner point solution. To see the corner point optimum algebraically, notice if there was an interior solution, the tangency condition implies (S + 10)/(C +10) = 3, or S = 3C + 20. Combining this with the budget constraint, 9C + 3S = 30, we find that the optimal number of CDs would be given by 3018â’=Cwhich implies a negative number of CDs. Since it’s impossible to purchase a negative amount of something, our assumption that there was an interior solution must be false. Instead, the optimum will consist of C = 0 and Helen spending all her income on sandwiches: S = 10. Graphically, the corner optimum is reflected in the fact that the slope of the budget line is steeper than that of the indifference curve, even when C = 0. Specifically, note that at (C, S) = (0, 10) we have P C / P S = 3 > MRS C,S = 2. Thus, even at the corner point, the marginal utility per dollar spent on CDs is lower than on sandwiches. However, since she is already at a corner point with C = 0, she cannot give up any more CDs. Therefore the best Helen can do is to spend all her income on sandwiches: ( C , S ) = (0, 10). [Note: At the other corner with S = 0 and C = 3.3, P C / P S = 3 > MRS C,S = 0.75. Thus, Helen would prefer to buy more sandwiches and less CDs, which is of course entirely feasible at this corner point. Thus the S = 0 corner cannot be an optimum]