Herbert spends all of $50 of his pay check on food and shelter which each cost $5 per unit. a....

Question:

Herbert spends all of $50 of his pay check on food and shelter which each cost $5 per unit.

a. What is the equation of his budget line?

b. Sketch the budget line and two possible indifference curves that Herbert might have. One indifference curve should show Herbert spending his entire budget but consuming too much shelter (hint: this point will not be the best feasible bundle). Label that point on the graph A. The other indifference curve should sow Herbert optimizing his utility. Label the optimal point B.

c. What is Herbert's marginal rate of substitution between food and shelter when he is consuming his utility maximizing market basket?

Consumer Utility Maximization

A consumer's budget constraint establishes the feasible combinations of different goods that she can consume. Together with the consumer's set of indifference curves it can be used to determine the optimal consumption bundle from all of the available options.

Answer and Explanation:

a. The equation for his budget line is as follows, where QF and QS are, respectively, the quantities of food and shelter consumed:

  • {eq}\$50 = \$5(QF)...

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The Indifference Curve for Substitutes & Complements in Economics

from Economics 101: Principles of Microeconomics

Chapter 3 / Lesson 14
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