Question

# Suppose that Ken cares only about bathing suits (B) and flip-flops (F). His utility function is...

Suppose that Ken cares only about bathing suits (B) and flip-flops (F). His utility function is U = B^0.75*F^0.25. The price of bathing suits are \$12, and the price of flip-flops are \$6. Ken has a budget of \$240.

(a) (4 points) Draw and label a graph containing Ken’s budget line with bathing suits (B) on the x-axis and flip-flops (F) on the y-axis. Graph the x and y intercepts and determine the slope of the budget line.

(b) (4 points) Define and show mathematically the two conditions that need to be met for a consumption allocation {B ∗ , F ∗} to maximize utility.

(c) (4 points) What is the marginal utility of good B (MUB) and of good F (MUF) for Ken.

(d) (8 points) What is the optimal choice of B and F for Ken to maximize his utility? Label this point A on your graph from part (a).

(e) (5 points) What is the utility generated by Ken from his optimal consumption of B and F from part (d)? Find another bundle that also achieves this utility, label this new bundle point B on your graph from part (a) and draw an indifference curve between points A and B.