Every month, a family of three spends $2,000 on food (F) and other items (O). The family’s preferences are represented by the utility function U(F,O) = F1/5O4/5. The unit price of food and the unit...

Every month, a family of three spends $2,000 on food (F) and other items (O). The family’s preferences are represented by the utility function

U(F,O) = F1/5O4/5.

The unit price of food and the unit price of other items are both $1.a) Find this family’s monthly food expenditure. The family could join a consumers’ club. At the club, food costs 20% less than in other stores (i.e., at the food club PF = $0.8).

1. b) Suppose the club did NOT charge a membership fee: how much money would the family spend on food? How much food would the family buy?


2. c) Would the family be willing to pay more than $80 to join the consumers’ club? Clearly justify your answer.