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Econ212 Spring2013 Le_Linh Practice_Problem_for_MidtermI

In order to maximize her utility robin shouldnt spend

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Unformatted text preview: olution: • If Robin spends all of her income on sweaters, she can buy 10 sweaters and 0 pants: u(p,s) = u(0,10) = 0 • Similarly, utility is 0 if Robin spends all of her money on pants. à༎ In order to maximize her utility, Robin shouldn’t spend all of her money on only one item. Ø། F.O.C L = p1/5 c4/5 – λ.pp.p – λ.ps.s + λ.160 = p1/5 c4/5 – λ.20.p – λ.16.s + λ.160 • [λ] = - 20p – 16s + 160 = 0 à༎ 20p* + 16s* = 160 à༎ Optimum must satisfy the budget constraint •...
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