Explain model of the optimal bundle

Reference no: EM13176800

Carl has a utility function over two goods apples (A) and bananas (B) given by ( ) { }. Where min is the minimum function, i.e. it is the smallest number out of the list of two numbers.

a. Suppose that Carl's budget is $20 and that apples cost $5 per unit and bananas cost $2 per unit. Draw our model of the optimal bundle with Apples on the horizontal axis. (You must show his indifference curves and his budget set.)

b. Find Carl's utility maximizing bundle and label on your picture.

c. Now suppose that the price of apples decreases to $2 per unit. Draw the new budget line on your picture and find the new optimal bundle of apples and bananas.

Reference no: EM13176800

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