Michael, the CEO of a successful firm, enjoys both income Y, and perquisites, S (such as a nice office and expensive office furniture). Michael’s utility function (Chapter) is U(S, Y) with normal (convex to the origin) indifference curves. Michael receives a base salary of M. He is able to determine the level of perquisites provided by the firm up to a maximum allowable budget of B. However, any of this budget not spent on perquisites is given to Michael as a bonus over and above his base salary. Illustrate Michael’s utility maximization problem in a diagram in which you show his indifference curves and his budget line.
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