Question

Casper consumes cocoa and cheese. Cocoa is sold in an unusual way. There is only one supplier, and the more cocoa you buy from him, the higher the price you have to pay per unit. In fact y units of cocoa will cost Casper y^2 dollars. Cheese is sold in the unusual way at a price of 2 dollars per unit. Casper's income is 20 dollars and his utility function is U(x,y) = x+2y, where x is his consumption of cheese and y is his consumption of cocoa.

a. Draw Casper's budget set and shade it in.
b. Draw some of his indifference curves and label the point that he chooses.
c. Calculate the amount of cheese and the amount of cocoa that Casper demands at these prices and this

Answer 1

Answer:

The graph has been attached.

Explanation:

a. Please see attached graph with the shaded budget set labelled A

b. Please see attached. Curve C; D and E are the indifference curves. The most suitable one would be D since it is on the budget curve. E is not maximum utility and C is unattainable given his budget of $20.

c.  U (X,Y) = X + 2Y

At C, Utility = 10 + 2(10) = $30. That is above his budget

At D, Utility = 10 + 2(5) = $20. This is within his budget. – most utility.

At E, Utility = 5 + 2(5) = $15. This is below his budget.  

The Indifference curve that gives most utility is D, where cheese is 10 and cocoa is 5 units.