Problem: The task is to use indifference curves and budget constraints to determine which of these two programs to chose. You are to assume that income is equal to $400 per month to spend on long-distance phone service and all other good (D) and that the utility function is U=mD. For each program, calculate the values of m and D that maximize utility. Determine and explain, for each program, whether or not she chooses to purchase additional minutes at the stated price. It?s important that you label the intercept points for budget constraints and insert the proper indifference curves and the utility levels and relevant MRS associated with each curve. D is on the Y-axis and m is on the x-axis.
Program 1: For $50 per month, mimi can call up to 400 minutes per month (m) at no additional charge. Each additional minute beyond 400 costs $0.35 per minute (Pm)
Program 2: For $100 per month, mimi can call up to 1,000 minutes per month at no additional charge. Each additional minute beyond 1,000 costs $0.25 per minute (Pm)
I mainly need the budget constraint equations, in some form similar to
I + S = Pm*m + Pd*D or what ever other variables it needs
I = income
S = subsidy