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2. Consider the information shown for Fred the table to the right. He spends all of his daily income of $12 on bratwurst and beer. (Fred lives in Milwaukee, obviously.) Brats cost $2 each, beers costs $1 each. Fred's optimal consumption bundle will be:
Fred's optimal consumption bundle must satisfy two conditions:
1. It must cost exactly $12 2. The ratio of Marginal Utilities must equal the ratio of prices. Brats cost twice as much as beer so their marginal utility must be twice that of beer. There are a number of bundles where this is true, but only one that costs exactly $12. When he buys 3 Brats and 6 Beers the marginal utility of Brats is 12 while that of beer is 6. This bundle also costs exactly $12, so it is Fred's optimal bundle. |
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