The utility (U) obtained by Olympia by consuming food (F) and shelter (S) is
given by utility
function U = FS
(i) Draw the indifference curves associated with utility levels of 12 and 24
utiles. (4 marks)
(ii) If food costs Sh. 100 per unit and shelter Sh. 300 per unit and Olympia’s
monthly income equals Sh. 1,200 to be spent entirely on these two
commodities use graphical methods to determine the Utility maximizing
choice of food and shelter for this household (6 marks)
(iii) Calculate the marginal rate of substitution when Olympia spends the Sh.
1,200 budget by
purchasing three units of each.
(3 marks)
(iv) Illustrate the effect on the optimal choice in (ii) above when Olympia’s
income rises to
Sh. 3,600