Brenda wants to buy a new car and has a budget of $25,000. She has just found a magazine that assigns each car an index for styling and an index for gas mileage. Each index runs from 1 to 10, with 10 representing either the most styling or the best gas mileage. While looking at the list of cars, Brenda observes that on average, as the style index increases by one unit, the price of the car increases by $5000. She also observes that as the gas-mileage index rises by one unit, the price of the car increases by $2500.
a. Illustrate the various combinations of style (S) and gas mileage (G) that Brenda could select with her $25,000 budget. Place gas mileage on the horizontal axis.
b. Suppose Brenda’s preferences are such that she always receives three times as much satisfaction from an extra unit of styling as she does from gas mileage. What type of car will Brenda choose?
c. Suppose that Brenda’s marginal rate of substitution (of gas mileage for styling) is equal to S/(4G). What value of each index would she like to have in her car?
d. Suppose that Brenda’s marginal rate of substitution (of gas mileage for styling) is equal to (3S)/G. What value of each index would she like to have in her car?