Chapter3

# If equal multiple optimal bundles along the

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If equal: Multiple optimal bundles along the indifference curve/budget line. If greater: Corner solution where the optimal bundle is at the intersection between the budget line and the horizontal axis (consuming only good X). If less: Corner solution where the optimal bundle is at the intersection between the budget line and the vertical axis (consuming only good Y). X Y P P

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Solve the Rational Consumer’s Problem. Perfect Substitute Linear Utility Function Example: Problem 10 p.82 For Dan, coffee and tea are perfect-substitutes: one cup of coffee is equivalent to one cup of tea. Suppose Dan has \$90 per month to spend on these beverages, and coffee costs \$0.9/cup while tea costs \$1.2/cup. Find Dan’s best affordable/optimal bundle of tea and coffee. How much could the price of a cup of coffee rise without harming her standard of living? Similarly, how much could the price of a cup of tea rise?
Solve the Rational Consumer’s Problem. For Perfect Complement L-shape Utility Function. Notice U=min(aX,bY) This implies the optimal ratio is always aX=bY. Use the optimal ratio and the budget constraint to solve for the optimal solution for X and Y.

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Solve the Rational Consumer’s Problem. For Perfect Complement L-shape Utility Function. Example: Problem 16 p.83 Carlo budgets \$9/week for his coffee and milk. He likes it only if it is prepared with 4 parts coffee, 1 part milk or U=min(C,4M). Coffee costs \$1/unit, milk \$0.5/unit. How much coffee and how much milk will Carlo buy per week? How will your answers change if the price of coffee rises to \$3.25/unit?
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• Fall '12
• Danvo
• Utility, Cobb Douglas utility

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