Arthur's preferences are defined over two basic food groups, beer, x₁, and ice cream, x₂.His utility function is u(x₁, x₂)=x²₁+ x₂.He has $100 to spend, and each of these goods costs $10 per quart. A)Arthur will consume 5 quarts of ice cream and 5 quarts of beer. B)Arthur will find that 10 quarts of beer and no ice cream is the best bundle. C)Arthur will find that 10 quarts of ice cream and no beer is the best bundle. D)Arthur is indifferent between any two points on the line that connects (5, 5)and (10, 10). E)Arthur will spend 2/3 of his income on beer and 1/3 of his income on ice cream.

Question

Quizplus · Accepted Answer

Arthur's utility function suggests he derives more utility from beer since it is squared in the function. Given his budget constraint, he will maximize utility by spending all his money on beer, resulting in 10 quarts of beer and no ice cream.

Arthur's Preferences Are Defined Over Two Basic Food Groups, Beer