Utility maximization, graphs. (14 points) Suppose Lauren is working at a job where she makes $100 a...

Question

Utility maximization, graphs. (14 points) Suppose Lauren is working at a job where she makes $100 a day. She can spend that money on food and entertainment where the price of food is $2 per unit and the price of entertainment is $5 per unit. (a) (3 points) Graph her budget constraint with food on the horizontal axis. Draw an indifference curve that shows that her optimal choice is 20 units of food and 12 units of entertainment. Assume that she values a balance of both food and entertainment. (b) (3 points) Suppose her job transfers her to a different location. She continues to make $100 a day, but the prices of food and entertainment are now $4 and $5/3, respectively. On the same graph as part (a), draw the new budget constraint. (c) (4 points) Does Lauren’s optimal choice of food and entertainment change in the new location? Explain why or why not. If it changes, show her new optimal choice on the graph using a new indifference curve. (d) (4 points) Discuss how the job transfer affects Lauren’s well-being (Is she better off, worse off, or the same?). Explain why this is the case given that her income has remained the same.

Robert · Accepted Answer

Suppose Lauren is working at a job where she makes $100 a day. She can spend that money 
on food and entertainment where the price of food is $2 per unit and the price of 
entertainment is $5 per unit.  
(a) (3 points) Graph her budget constraint with food on the horizontal axis. Draw an 
indifference curve that shows that her optimal choice is 20 units of food and 12 units of 
entertainment. Assume that she values a balance of both food and entertainment.  
Answer – Budget equation is 
2F +5E = 100
(b) (3 points) Suppose her job transfers her to a different location. She continues to make 
$100 a day,

Utility maximization, graphs. (14 points) Suppose Lauren is working at a job where she makes $100 a day. She can spend that money on food and entertainment where the price of food is $2 per unit and...

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