Question

Question 5 [20 marks] (a) Tangi loves Unam shandy, which she makes by combining one glass of oshikandela and two scoops of ice cream. Pandu is on a diet that assigns points to food and drinks. One glass of oshikandela is one point and one scoop of ice cream is one point. She can consume any comnination of oshikandela and ice cream as long as the total number of points is two. (i) What king of goods are oshikandela and ice cream for Tangi? Show her indifference curves on a graph. (5) (ii) What kind of goods are oshikandela and ice cream for Pandu? Show her indifference curves on a graph. (5) (iii) Define and illustrate mathematically the consumer problem. (5) With the aid of a diagram explain the consumer equilibrium. (5)

Answer 1

(I) oshikandela & ice creams are perfect complements goods.

Bcoz two goods are jointly consumed.& Are always used in a fixed proportions.

IC are right angled shapes.

utility function :

U ( o, i ) = Min [ 2*o, 1*c ]

(ii) for Pandu, the two goods are perfect substitutes, bcoz pandu is indifferent between consuming either oshikandela & ice cream..

IC are downwards sloping lines.

U( o, i ) = o + i

(iii) Consumer problem:

Max U( o, i) subject to the Budget constraint: o*P_{​​​​​​o}+ i *P_{​​​​​​i}= M

M is income

(iv) thus at equilibrium, budget constraint should be tangent to IC.

So MRS = price ratio of two goods.