Question

Jane spends $210 per month on wine and beer. Her utility function is given by TU = 100WB, where W represents the number of bottles of wine that she buys and B represents the number of cases of beer that she buys. If wine costs $10 per bottle and beer costs $15 per case, she will maximize utility by buying: Selected Answer: Incorrect [None Given] Answers: Correcta. 10.5 bottles of wine and 7 cases of beer b. 2 bottles of wine and 3 cases of beer c. equal amounts of wine and beer d. 10 bottles of wine and 13.33 cases of beer e. none of the above

Answer 1

Jane spends $210 per month on wine and beer. Hence her income is 210.

Her utility function is given by TU = 100WB, where W represents the number of bottles of wine that she buys and B represents the number of cases of beer that she buys. |MRS| = MUW/MUB = B/W.

If wine costs $10 per bottle and beer costs $15 per case, the price ratio is 10/15 or 2/3. At the utility maximizing bundle |MRS| = price ratio

B/W = 2/3 or W = 1.5B

Use this in the budget equation

210 = 10W + 15B

210 = 10*1.5B + 15B

B = 7 and W = 10.5

she will maximize utility by buying

a. 10.5 bottles of wine and 7 cases of beer