Trevor always begins his day with a strawberry milkshake. He makes it by mixing milk (20) ( x 1 ) with five strawberries ( x 2 ).

Trevor always begins his day with a strawberry milkshake. He makes it by mixing milk

(20)

(

x

1

) with five strawberries (

x

2

). The secret of a really good milkshake lies in the optimal

proportion of milk and fruit: one glass always comes with five strawberries.

(a)

Plot in a diagram Trevors’ preferences. Depict three indifference curves that pass

through the following bundles (5,1), (10,10) and (15,4). What is the MRS at each

of these points?

(b)

What utility function represents these preferences?

(c)

Indicate the leve of utility corresponding to each indifference curve from your draw-

ing in part a.

(d)

Multiply your utility function by 10 and add 2 to it. How does the map of indif-

ference curves change? Explain why. How was the level of utility associated with

each indifference curve affected?

(e)

Trevor spends $100 per month on his favorite milkshake and pays $1 for a glass of

milk and $1 for each strawberry (they are organic). Find Trevor’s demand for milk

and strawberries and depict it on the graph.

(f)

The organic strawberries are replaced by genetically modified ones. These are, on

average, 2.5 times larger. Consequently, the optimal proportion of milk to straw-

berry becomes 1:2. Plot the indifference curves for milk and genetically modified

strawberries. Write down a utility function that represents them.

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