Caroline likes vanilla and chocolate ice cream and she is indifferent between on
ID: 1140888 • Letter: C
Question
Caroline likes vanilla and chocolate ice cream and she is indifferent between one scoop of vanilla and one scoop of chocolate ice cream. She only cares about the total number of scoops of ice cream that she has.
A. Write down a utility function that represents Caroline's preferences over consumption bundles of vanilla ice cream and chocolate ice cream. (I think they are perfect substitutes?)
B. What 'type' of preference does Caroline have?
C. Write down a formula for Caroline's demand function for vanilla ice cream as a function of the prices of vanilla and chocolate ice cream and her income.
Explanation / Answer
1. The utility function will be of perfect subsititutes i.e U = X+Y where X denotes one scoop of vanilla icecream and Y denotes one scoop of chocolate ice cream.
2. Marginal rate of substitution will be constant for perfect substitutes and Caroline is indifferent between her preferences of both goods.
3. If the price of vanilla icecream (P1) is more than price of chocolate ice cream (P2) - caroline will choose to buy all of vanilla ice cream and demand function will be quantity demanded of vanilla icecream (X) = M/P1 where M denotes the total money income for Caroline and P1 denotes price of vanilla ice cream.