Eco 405 Assignment 4 Monthly Income

Eco405Assignment4(DueFeb.27,Wednesday) 1. Connie has a monthly income of $200, which she al locates between two goods: meatandpotatoes.a. Supposemeatcosts$4 per pound andpotatoes cost $2 per pound. Draw herbudgetconstraint. Let M=meatand P=potatoes. Conniesbudgetconstraintis $200=4M+2 P,orM =50-0.5 P.As shown in the figure below, with M on the vertical axis, the vertical intercept is 50 . Thehorizontalinterceptmaybefoundbysetting M=0andsolvingfor P.MeatPotatoesU=10050 257510025 50 75 100125BudgetConstraintandUtilityFunctionb. Suppose also that her utility function is given by the equation u(M, P) = 2M + P. What combination of meat and potatoes should she bu y to maximize her utility? (Hint:Meatandpotatoesareperfectsubstitutes.) Whenthetwogoodsareperfectsubstitutes,theind ifference curvesarelinear. Tofindthe slope of the indifference curve, choose a level of utility and find the equation for arepresentative indifference curve. Suppose u=50, t hen 2M+P=50, or M=25-0.5P. Therefore, Connies budget line and her indifferenc e curves have the same slope. Conniesutilityisequalto100whenshebuys50p oundsofmeatandnopotatoesornomeat and 100 pounds of potatoes. The indifference curve forU = 100 coincides withher budget constraint. Any combination of meat and potatoes along this line willprovideherwithmaximumutility.c. Conniessupermarkethasaspecialpromotion. I fshebuys20poundsofpotatoes(at$2 per pound), she gets the next 10 pounds for free . This offer applies only to thefirst 20 pounds she buys. All potatoes in excess o f the first 20 pounds (excludingbonuspotatoes)arestill$2perpound. Drawherb udgetconstraint.Assume that potatoes are