Fred Consumes Quantities of Butter and Margarine; His Utility Function

question 31

Multiple Choice

Fred consumes quantities of butter and margarine; his utility function is given by U = 5M + 2B.If Fred has $10 to spend on butter and margarine,and if butter costs $2 per pound and margarine costs $1 per pound,what is his optimal bundle of butter and margarine?

• A) 3 butter and 4 margarine.
• B) 5 butter and 0 margarine.
• C) 0 butter and 10 margarine.
• D) 2 butter and 6 margarine.
• E) None of the above.

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Definitions:

Internal Rate

Often synonymous with "Internal Rate of Return," referring to the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Capital Expenditure

Capital deployed by a corporation to buy, improve, and upkeep tangible assets like land, factories, or machinery.

NPV

Net Present Value, a calculation used to determine the present value of a series of future cash flows minus the initial investment, utilized in capital budgeting to assess the profitability of an investment.

Least-Cost Decision

A decision-making process focused on selecting the option that requires the lowest financial outlay while still achieving the desired result.