Unformatted text preview: cups of tea to give up one cup of coffee. This consumer’s budget constraint can be written as 2.5 10 C T + = . What should the consumer buy? Answer: Since 2 cups of tea have to be given up for 1 cup of coffee, we know that utility can be expressed as U=T + 2C and MU T = 1 and MU C = 2. We can also deduce from the budget constrain that P T = 1 and P C = 2.5. When we plug in the numbers for MU T / P T and MU C / P C , we see that the marginal utility per price for tea (1) is higher than the one for coffee (.8). Thus, the consumer can reach the highest utility (10) within the budget ($10) by buying 10 cups of tea and no coffee. This also means that the basket is located at a corner point....
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- Spring '11
- Supply And Demand, unchanged demand curve, smaller equilibrium quantity