Question 1 - Brad's utility is a function of steak (S) and other goods (Y) and is given by U = S0.5Y0.5. Brad currently earns $2000. At the current prices of the two goods (PS = $50 and PY = $50), how many units of each good should he consume? If the price of steak doubles, how would his optimal consumption bundle change?
Question 2 - Toni likes to purchase round trips between the cities of Raleigh and Chicago and other goods out of her income of $10,000. Fortunately, Briner Airways provides air service and has a frequent-flyer program. A round trip between the two cities normally costs $500, but any customer who makes more than 10 trips a year gets to make additional trips during the year for only $200 per round trip. Assume other goods (good Y) cost $1. Draw a graph that illustrates Toni's budget constraint, putting flights (F) on the horizontal axis. Make sure you indicate the horizontal and vertical intercepts.
Question 3 - Ashley loves pizza with beer. She loves the pairing so much that she actually does not enjoy pizza unless she has exactly 2 pieces of pizza for every bottle of beer.
a. Write down a utility function that is consistent with Ashley's preferences.
b. The current cost of a bottle of beer is $4 and a piece of pizza is $2. What is the maximum level of utility Ashley can attain if she has $40 to spend? Illustrate this choice graphically.