Optimal Consumption and Budget Constraint for Jeremy

(a) What is Jeremy’s budget constraint?

Jeremy's budget constraint is represented by the equation: F + E = 100, where F is the amount spent on food and E is the amount spent on entertainment.

Explanation:

Jeremy's budget constraint can be defined by the equation F + E = 100, where F represents the amount of money he spends on food and E represents the amount he spends on entertainment. Since the price of both food and entertainment is $1, his total budget of $100 can be allocated between these two goods.

(b) Plot Jeremy’s budget constraint.

On a graph, Jeremy's budget constraint forms a straight line with food on the horizontal axis and entertainment on the vertical axis.

(c) On the same graph, plot Jeremy’s utility maximizing (optimal) consumption of food and entertainment. Be sure to draw the indifference curve that this bundle belongs to.

The optimal consumption of food and entertainment for Jeremy lies at the point where the budget constraint is tangent to the highest possible indifference curve, representing his maximum utility.

Explanation:

Jeremy's optimal consumption point lies at the tangency of his budget constraint and the highest possible indifference curve, representing his maximum utility. This is where his marginal rate of substitution (MRS), the rate at which he's willing to trade food for entertainment, is equal to the price ratio (1:1). This point reflects Jeremy's preferred combination of food and entertainment that provides him with the most satisfaction given his budget.