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a. A young connoisseur has $600 to spend to build a small wine cellar. She enjoys two vintages in particular: a 2001 French Bordeaux (wf) at $40 per bottle and a less expensive 2005 California varietal wine (wc) priced at $8. If her utility is U(wf, wc)=((wf)^2/3)((wc)^1/3) then how much wine should she purchase?

b. When she arrived at the wine store, our young oenologist discovered that the price of the French Bordeaux had fallen to $20 a bottle because of a decrease in the value of the euro. If the price of the California wine remains stable at $8 a bottle how much of each wine should she pruchase to maximize utility under these altered conditions?

c. Explain why this wine fancier is better off in part (b) than in part (a). How would you put a monetary value on this utility increase?

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Business Economics, Economics

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