Question

Regardless of his income and regardless of prices, Smedley always spends 25% of his income on housing, 10% on clothing, 30% on food, 15% on transportation, and 20% on recreation. This behavior is consistent with which of the following?
a. All goods are perfect substitutes.
b. Smedley's demands for commodities do not change when their prices change.
c. Smedley consumes all goods in fixed proportions.
d. Smedley has a Cobb-Douglas utility function.
e. More than one of the above.

Answer 1

Answer: D. Smedley has a Cobb-Douglas utility function.

Explanation:

Utility is the satisfaction that a customer gets when he or she uses a particular good or service.

Since we're informed that regardless of his income and regardless of prices, Smedley always spends 25% of his income on housing, 10% on clothing, 30% on food, 15% on transportation, and then spends 20% on recreation, this behavior is consistent with a Cobb-Douglas utility function.

In this case, the goods aren't perfect substitute as they do not serve safe function. Also, Smedley doesn't consumes all goods in fixed proportions. Therefore, the correct option is D.