Assume George has a budget of $6/week to spend on lollipops and gumballs, and that the price of
lollipops is $1.
a. If George spends his entire budget on gumballs (and buys no lollipops), he can afford to buy 12.
What must the price of gumballs be?
b. Draw George’s budget constraint for lollipops and gumballs.
c. Assume George gets the utility given in the table below from consuming these two goods. Fill in the rest of the table, calculating the marginal utility as well as the marginal utility per dollar spent for each good.
d. Given the information in the table and his budget of $6, what is George’s utility-maximizing consumption bundle, and in what order does he consume it?
e. Draw the budget constraint for George, and show his utility-maximizing consumption bundle on the graph using U*.
f. Consider if George’s budget were to fall to $2.00. Draw his new budget constraint.
g. What does George now choose to consume? How do you know? Label this U’.