The Table Below Represents Sue’s Preferences For Bottled Water And Soft Drinks, The Combination Of Which Yields The

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Introduction

Definition of Budget constraint

Budget constraints show the relationship between the two goods, their prices and the income of the consumer.

Budget constraints are shown as:-

XPx YPy=M

X and Y are quantities of two goods.

Px and Py are their prices.

M is the income of the consumer.

Explanation:

An introduction has been provided

Calculation

Budget Constraint Calculation:

Price of bottled water (Pw​):\$0.80

Price of soft drink (Ps​):\$2.00

Monthly budget: \$20

Budget Constraint Equation:

0.8W 2S=20

where W represents bottled water and S represents soft drinks.

Slope Calculation:

The slope of the budget line is calculated as SW​ when the budget line intersects the axes.

When W=0,S=10 (all budget spent on soft drinks).

When S=0,W=25 (all budget spent on water).

Hence, the slope SW=1025=0.4

Since the budget line is downward sloping, the slope is negative. Therefore, the slope is −0.4.

Optimal Bundle Calculation:

At the optimal bundle, the absolute value of the slope is equal to the MRS.

From the given table:

The MRS of 0.4 corresponds to combination D.

Explanation:

The combination that satisfies Sue’s utility-maximizing problem, given her budget constraint and preferences, is combination D.

The slope is -0.4

Hence, The combination that satisfies utility maximization problem is D