Ernie has two cell phones and obtains positive utility from talking on both. His utility using AT&T (x1) and Verizon (x2) is given by: U(x1, x2)= x_1 ^0.5+ x_2^0.5 The price of calls at AT&T is $1 per unit and the price of calls at Verizon is $4 per unit. Ernie spends $2000 on phone calls per year a) What is Ernie’s optimal bundle? (Hint: You may use the Lagrange Method or simply set the MRS equal to the price ratio, and plug this into the budget constraint) b) What is Ernie’s utility at this optimal bundle?

c) Why is it the case that at the optimal bundle Ernie is using Verizon (the more expensive service)? Why would he not spend all his money on AT&T (the less expensive service)?