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John consumes different combinations of Salads and Candies.  John’s preference is summarized as follows:

Indifference curve U1 shows that one salad and ten candies (combination A) give the consumer the same level of satisfaction as two salads and six candies (combination B).

U1 also shows that four salad and three candies (combination C) give John the same satisfaction as seven salads and one candy (combination F).

Four salads and seven candies (Combination R) gets John to a higher level of satisfaction, which is defined by the higher indifference curve U2.

Finally, all combinations on the indifference curve U0 refer to the lowest level of satisfaction and the lowest indifference curve.

a) With the above information, draw the indifference map for John.

b) The Marginal Rate of Substitution (MRS) refers to the amount of one good (salads) that a consumer is willing to give up for an additional unit of another good (candies) to remain on the same indifference curve. What would be the MRS if John moves from A to B; from B to C; and from C to F.?

c) Now suppose that the price of salads is $2 while the price of candies is $1. John has $10 that he can spend right now on salads and candies. Draw John’s budget line.

d) At which point will John maximize his utility, given his budget constraint?

Business Management, Management Studies

  • Category:- Business Management
  • Reference No.:- M99158

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