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Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C)....

Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridget’s preferences are represented by the utility function U(F,C)=10FC, while Erin’s preferences are represented by the utility function U(F,C) = 20 * F . Food price is $10 per 2 * C 2 unit and Clothing price is $15 per unit. Income is $1000 for both of them.

a) Find optimal choices of food and clothing for Erin and Bridget. No need to draw a curve.

b) From optimal choice, imagine Erin and Bridget have to decrease consumption of clothing. Who would be more upset? In other words, who would be giving up more in terms of utility? Remember, income is still constant.

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Answer #1

B) A decrease in consumption of clothing will affect Bridget more than Erin. Infact Erin will not be affected at all, because his previous consumption for clothing is 0. His utility function gives us the information that Erin does not derive any utility from the consumption of clothing. therefore, Bridget will be affected more in terms of utility lost for giving up or decreasing the consumption of clothing.

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