Answer

Solution

1. 1

   Marginal utility per rupee:

2. 2
   $$\frac{MU_B}{p_B} = \frac{4}{5} = 0.8, \qquad \frac{MU_Y}{p_Y} = \frac{2}{1} = 2.$$
3. 3

   Other goods give more utility per rupee, so the consumer prefers spending cash on $Y$. However, the Rs.\ 50 gift card is locked in books, so she must use it on books: $B \ge 10$.

4. 4

   Optimum: use the gift card fully ($B = 10$ from gift card), spend all Rs.\ 200 cash on $Y$ ($Y = 200$). Buying any extra books from cash would cost $\tfrac{4}{5}$ utils per rupee versus $2$ utils per rupee from $Y$.

5. 5

   So $B = 10$, $Y = 200$.

Answer structure / marking notes

Content note