## Expert Answer

This solution was written by a subject matter expert. It’s designed to help students like you learn core concepts.

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.

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.

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