This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: budget constraint. How much food and how much clothing will Alice choose to buy? The tangency condition states that, for an interior bundle to be chosen by the consumer, MRS F , C = P F P C must hold. Using the information given, this means C + 1 F = 1 2 must hold. Solving, we get F = 2 C + 2 . Since Alices preferences satisfy more is better , her chosen bundle must be on her budget line. Substituting the condition above in the budget constraint yields: F + 2 C = 22 ( 2 C + 2 )+ 2 C = 22 4 C = 20 C = 5 . Substitution this back in the tangency condition yields F = 12. So Alice will choose the bundle ( 12 , 5 ) . 2...
View Full Document
This homework help was uploaded on 02/19/2009 for the course PAM 2000 taught by Professor Evans,t. during the Fall '07 term at Cornell University (Engineering School).
- Fall '07