Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 24

(More challenging problem) Mario Casali is a TV newscaster who gets an annual clothing allowance to buy suits that he must wear during his televised forecasts. He allocates the allowance each year between expensive Italian suits and cheap American suits. Mario's utility function for suits is SA.5 where S is the number of Italian suits bought and A is the number of American suits bought. Last year. Mario bought two Italian suits and four American suits. [Note: MU S = A.5 and MU A =.5 SA (-.5) ]
a. If Mario was maximizing his utility last year, what was the ratio of the price of an Italian suit to the price of an American suit ( P S / P A )
b. What was Mario's clothing allowance last year if the price of an Italian suit was $1,000
c. If Mario has the same allowance this year as last year, and American suit prices have not changed, how high would the price of Italian suits have to rise in order for Mario to want to buy exactly one Italian suit this year