Solutions Economics

Felix has a budget of $60. He needs your help deciding how to spend it. He lives in a small town, an

Question: Felix has a budget of $60. He needs your help deciding how to spend it. He lives in a small town, and there are only two goods available for purchase. The two goods are lattes (Starbucks is everywhere!) and movies. Lattes cost $5 each, and movies cost $10 each.

a. Draw Felix’s budget line with lattes on the horizontal axis. What is its slope?

b. You try very hard to elicit Felix’s preferences. After hours of probing questions, you find that you can construct a schedule of his marginal utilities over lattes and movies. It wasn’t pretty, but you’re quite proud nonetheless. For some allocations of lattes and movies, the table below presents the extra utility Felix derives from consuming one more latte, denoted MU(Lattes), and the extra utility he derives from consuming one more movie, denoted MU(Movies). Based on this schedule of marginal utilities, and given Felix’s budget of $60, how many lattes and movies should he consume? What if his budget were $80? What if it were $40?

Number of Lattes	Number of Movies	MU(Lattes)	MU(Movies)
0	4	4	0
0	6	6	0
2	3	3	2
2	5	5	2
4	2	2	4
4	4	4	4
4	6	6	4
6	1	1	6
6	3	3	6
6	5	5	6
8	0	0	8
8	2	2	8
8	4	4	8
10	1	1	10
10	3	3	10
12	0	0	12
12	2	2	12
14	1	1	14
16	0	0	16