Question

Suppose Isabella’s income is $100 per month, which she allocates between coffee (C) and magazines (M). Each unit of coffee costs $2. Magazines cost $10 each if she purchases between 1 and 5 magazines. If she purchases more than 5 magazines in a month, the price falls to $5 for the 6th magazine and all subsequent magazines. Note that inorder to get the discount she must purchase 5 magazines.

a)Write an expression to describe Isabella’s budget constraint. (A graph may be useful in thinking about part b).

b)Assuming that Isabella’s indifference curves are convex, is it possible that Isabella may have more than one utility-maximizing solution? Explain.

Answer 1