Question: 3.2 Steves utility function is U = BC, where B = veggie burgers per week and C = packs of cigarettes per week. Here, MUB

3.2 Steve’s utility function is U = BC, where B = veggie burgers per week and C = packs of cigarettes per week. Here, MUB = C and MUC = B.

What is his marginal rate of substitution if veggie burgers are on the vertical axis and cigarettes are on the horizontal axis? Steve’s income is $120, the price of a veggie burger is $2, and that of a pack of cigarettes is $1. How many burgers and how many packs of cigarettes does Steve consume to maximize his utility? When a new tax raises the price of a burger to $3, what is his new optimal bundle? Illustrate your answers in a graph. In a related graph, show his demand curve for burgers with after-tax price on the vertical axis and show the points on the demand curve corresponding to the before- and after-tax equilibria. (Hint: See Appendix 4B.) C

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