Problem i. The consumer side analogue to firm’s goal of profit maximization is the goal of utility maximization subject to a budget constraint.

1.     Problem

                               i.           The consumer side analogue to firm’s goal of profit maximization is the goal of utility maximization subject to a budget constraint. Utility means satisfaction. So let’s consider an individual who consumes only two goods: ale and bread. The quantity of ale is given in pints/week and the quantity of bread is given in loaves per week. Suppose the price of ale is $2/pint and the price of a loaf of bread is .50/load.

           Let Income $8. The consumer’s utility is given below.


           0                        0                                         0                     0

               1                      40                                         1                     15

           2                      70                                         2                     23

           3                      90                                         3                     30

           4                     100                                         4                     35

           5                     105                                         5                     38

           6                     107                                         6                     40.5

           7                     108                                        7                     42

           8                     108.5                                      8                     43

a.   Which (Ale, Bread) bundle maximizes this consumer’s utility given the     

 budget constraint

b. Does this bundle violate our “bang for the buck” rule for maximization? 


Special Utility Functions

Compute U for the following functions and bundle.

                               i.           U ( ) =  

                       (4, 0)

                       (3, 1)

                       (2, 2)

                       (1, 3)

                       (0, 4)

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