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March 25, 2017

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Bridget has a limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Bridget's utility, while the last pound of cheese added 40 units. Is Bridget making the utility-maximizing choice? Why or why not? If not, what should she do instead? Why?

  • managerial econ - ,

    Cost = 10 w + 4 c
    d (cost) = 10 dw + 4 dc
    d (utility )= 50 dw + 40 dc

    her present state is
    w = 4
    c = 10

    Cost = 40 + 40 = 80
    to stay at the present cost
    10 dw + 4 dc = 0
    or
    dc = - (2.5)dw
    so
    d Utility at present cost = 50 dw -40(2.5) dw
    = 50 dw - 100 dw = -50 dw

    so if I increase wine by 1, I decrease cheese by 2.5
    AND I decrease my utility by 50!!!
    eat more cheese, less wine !!!

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