Question

5. Sayyad’s preferences are defined over two basic goods, beer, x​1,​ and ice cream, x​2.​ His utility function is u(x​1,​ x​2)​ = x​1​ + 2x​2.​ If he has $100 to spend and the price of either good is $10 per quart (i.e. P​1=​ 1, P​2=​ 1)

a. Sayyad will consume 5 quarts of ice cream and 5 quarts of beer.

b. Sayyad will find that 10 quarts of beer and no ice cream is the best bundle His indifference curve passing through 12 apples and 4 bananas will also pass 2

c. Sayyad will find that 10 quarts of ice cream and no beer is the best bundle

d. Sayyad is indifferent between any two points on the line that connects (5, 5) and (10, 10).

e. Sayyad will spend 2/3 of his income on beer and 1/3 of his income on ice cream.

Answer 1

Indifference curve shows the different possible combination of goods which gives equal level of satisfaction to the consumer at the given level of income.

Here utility function is = u(x​1,​ x​2)​ = x​1​ + 2x2

Which means 1 unit of ​beer gives 1 unit of satisfaction and 1 unit of ice cream gives 2 units of satisfaction.

Answer: Sayyad will find that 10 quarts of ice cream and no beer is the best bundle

Explanation: Since total amount of spending not exceeds from $100 and the maximum satisfaction is achieved in this option i.e 20 units (2*10).

All other options either spend more money or gives less satisfaction.