Tyrion, who likes beer and wine, lives in Westeros, where people buy things with Silver Stags (SS). The price of wine is 5SS per flagon and the price of beer is 2.5SS per jug. Tyrion’s daily income is 50SS.
a) Draw Tyrion’s budget line, putting wine on the y-axis and beer on the x-axis. Clearly label your diagram.
b) Tyrion’s utility function is U = Wine+Beer. Draw an indifference curve corresponding to U = 20. Clearly label your diagram.
c) Tyrion’s optimal consumption basket includes flagon(s) of wine per day and jug(s) of beer per day.
d) Assume that Tyrion’s utility function is U = Wine+? Beer. What is Tyrion’s daily consumption of wine?