Find melvyn demand for beer and pizza

Reference no: EM132197870

Question: Melvyn's preferences over beer and pizza can be represented by the following utility function: U(P,B) = P + lnB. Note that pizza is on the x-axis and beer is on the y-axis. Initially he faces fixed prices of $20 and $1 for pizza and beer respectively and has an income of $100. In addition, he has 5 bottles of beer in his refrigerator, which he can consume but not sell.

a) Graph Melvyn's feasible set. Find Melvyn's demand for beer and pizza.

b) Suppose that Melvyn's roommate Martin commands that for every bottle of beer that

Melvyn purchases he must buy Martin a bottle. Illustrate the effect of Martin's command on Melvyn's budget set. Find Melvyn's new demands for beer and pizza. How many bottles of beer does Martin receive?

c) Suppose that Martin changes his command and instead requires that Melvyn give him x number of bottles of beer regardless of the number of bottles of beer that Melvyn purchases. If the number of bottles x is set equal to the number of bottles that Martin received in your answer to part (b)then which command will Melvyn prefer? Briefly justify your answer.

Reference no: EM132197870

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