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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 Alice’s 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...
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- Fall '07