Proportion of two parts gin to one part vermouth

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Reference no: EM131246810

Mr. A derives utility from martinis (m) in proportion to the number he drinks: U(m) = m

However, Mr. A is very particular about his martinis: He only enjoys them made in the exact proportion of two parts gin (g) to one part vermouth (v). Hence, we can rewrite A’sutility function as U(m) = U(g,v) = min(g/2,v)

(a) Graph Mr. A’s indifference curve in terms of g and v for various levels of utiliy. Show graph- ically that regardless of the prices of the two ingredients, Mr. A. will never alter the way he mixes martinis.

(b) Calculate the demand functions for g and v. Notice that because the problem involves a perfect complements utility function, you cannot solve for utility-maximizing decisions by using calculus.

Reference no: EM131246810

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