Construct a utility function for a car-tire scenario where by a consumer derives satisfaction for every group of 1 car and 4 tires. Now suppose cars cost x and tires cost y each. If a consumer has income M, solve the utility maximization problem facing the consumer.
Answer :-
As we know that, car and tyres are complementary goods because they are always use together in a fixed proportion.
Therefore, utility function for perfect complement can be written as,
U(C, T)= Min [C, (1/4) T], where,
C= Quantity of car
T= quantity of tyres
These are used in fixed proportion,therefore
C = (1/4)T
4C = T ———(1)
Budget line: Cx + Ty = M ———(2)
Using equation 2 in equation 1 in budget line: Cx+ 4Cy= M
C(x+4y)= M
C= M/(x+4y); Use this in equation 1,
Utility maximization
4 [M/(x+4y)] = T
The above equation is the Utility maximization quantity of Tyre.
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