Alfredo lives on apples and bananas only. His utility function is U(a, b) = min{a + b, 2b}. He maximizes his utility subject to his budget constraint and consumes the bundle (a, b) = (4, 4). A) p_a p_b. B) p_a is less than or equal to p_b. C) p_a = p_b. D) p_a = 2p_b. E) None of the above.

Question

Alfredo lives on apples and bananas only. His utility function is U(a, b) = min{a + b, 2b}. He maximizes his utility subject to his budget constraint and consumes the bundle (a, b) = (4, 4). A) p_a > p_b. B) p_a is less than or equal to p_b. C) p_a = p_b. D) p_a = 2p_b. E) None of the above.

Quizplus · Accepted Answer

Alfredo's utility function suggests he will consume in a way that equalizes the two expressions in the min function. At (4, 4), a + b = 2b, so 4 + 4 = 2*4. This implies that the marginal rate of substitution is 1, meaning p_a is less than or equal to p_b to maintain this consumption bundle.

Alfredo Lives on Apples and Bananas Only