Spreadsheet #2: Budget and Indifference Curve Model

Create a spreadsheet illustrating the determination of a consumer's utility maximization bundle.

[Here's an example: Indifference & Budget Spreadsheet ]

Step 1:  To begin, chose your own values for the parameters below in order to create your budget and indifference curves.

I = Pb*B + Pc*C Budget Equation
U = B*C Utility Function

Where B and C are the amounts of two goods. The parameter values to be chosen are:

I = Consumer Income
Pb = Price of good B
Pc = Price of good C
U = Utility level

Step 2:  Create a table containing the quantities of good C and B-Budget and B-Utility. Under the good C column, simply enter data beginning with 0 and increasing by increments of, say, 5. Under the good B-Budget column, enter a formula that solves the budget equation for B. Under the B-Utility column, enter a formula that solves the utility function for B. Use this table to create an X-Y chart (not a line graph!) showing the budget and indifference curves. In creating your table, please make sure that you "anchor" the parameter values to ones chosen in Step 1. (By doing this, your graphs and calculations will adjust automatically whenever you change any of the parameter values). Your graph should have good C plotted on the x-axis and good B on the y-axis.

Be sure that you properly format the chart and completely label all axes and curves.  Please organize your spreadsheet so as to minimize the amount of scrolling that a user must do.

Step 3:  Create a table to organize your answers to the following questions:.

Q1: Given your initial parameter values for the budget line, what is the maximum utility that can be obtained? Approximately (to the nearest whole number) how many units of good B and good C are chosen at this bundle?

Q2: What happens to your answer to Q1 if the consumer's income increases by 25%?  Is good C a normal or inferior good?  Is good B a normal or inferior good?

Q3: What happens to your answer to Q1 if the price of good B decreases by 25%? 

Q4: What happens to your answer to Q1 if the price of good C increases by 25%?

Q5: What happens to your answer to Q1 if the consumer's income increases by 25% and the prices of good B and C also increase by 25%?

Step 4:  Save your spreadsheet to a file named as NAME_SS2.xls  (e.g., delemeester_ss2.xls) and email it to me by deadline.