Question

people consume eggs and toast at breakfast. Assume the typical person spends $5 per week on eggs and toast. Currently the price of eggs is $0.50 per egg, and the price of toast is $0.25 per piece. (a) (10 points) Graph the budget constraint budget constraint. (b) Assume that some people have a utility function given by U = min[4T, 2E] where T is the quantity of toast measured in slices, and E is the quantity of eggs. i. (5 points) Explain the relationship between toast and eggs. Be specific.

Answer 1

Budget = $5

Price of toast=$0.25

Price of egg=$0.50

So budget constraint

0.50 E + 0.25T= 5

If we spend whole money on eggs only we get 10 eggs

If we spend whole money on toast we get 20 toast

b)

Utility function

U=min [4T,2E]

This utility curve represents that Egg and Toast are complement goods. They are consumed at fixed proportion.

From utility function we know write that

4T=2E

E=2T

0.5E+0.25T=5

0.5x2T+0.25T=5

1.25T=5

T=4

E=2T=2x4=8

Bundle of (egg,toast) is (8,4)