Bruno, the consumer in Problem 3, is best friends with Bernie, who shares his love for energy bars and smoothies. The accompanying table shows Bernie€™s utilities from smoothies and energy bars.

The price of an energy bar is $2, the price of a smoothie is $4, and Bernie has $20 of income to spend.

a. Which consumption bundles of energy bars and smoothies can Bernie consume if he spends all his income? Illustrate Bernie€™s budget line with a diagram, putting smoothies on the horizontal axis and energy bars on the vertical axis.

b. Calculate the marginal utility of each energy bar and the marginal utility of each smoothie. Then calculate the marginal utility per dollar spent on energy bars and the marginal utility per dollar spent on smoothies.

c. Draw a diagram like Figure 10-4 in which both the marginal utility per dollar spent on energy bars and the marginal utility per dollar spent on smoothies are illustrated. Draw the quantity of energy bars increasing from left to right, and the quantity of smoothies increasing from right to left. Using this diagram and the utility-maximizing principle of marginal analysis, predict which bundle€”from all the bundles on his budget line€”Bernie will choose.

Transcribed Image Text:

Utility from energy bars (utils) Utility from Quantity of energy bars Quantity of smoothies (utils) smoothies 32 2 28 60 4 52 84 72 3 6 4 104 88 120 10 100