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Given the following: u = z;25 * 0,75 тах 21 > 0, x2 > 0 s.t. P1 * X1 + P2 * 22 <I • The marginal utility of good 1: MU = .25Equation Description: A consumer is attempting to maximize utility subject to a budget constraint. Utility equals the productGiven the following: u= 2,25 * x;75 тах 21 > 0, x2 > 0 s.t. P1 * 21 + P2 * 22 <I • The marginal utility of good 1: MU = .25 *Equation Description: A consumer is attempting to maximize utility subject to a budget constraint. Utility equals the product

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Answer #1

Q1) option D)

Original BC : P1X1 + P2X2 = M

8X1 + 4X2 = 400

New BC : 8X1 + 8X2 = 400

THEN new BC rotates inwards , slope falls from 2 to 1

-100- -80 -60 original BC 50 -40 -20 new BC 20 X1 40 50 60100- -80 -60 -40 20 new set of affordable choices

Q2) option B)

At eqm, MRS = P1/P2'

MRS = MU1/MU2 = X2/3X1

At new eqm, X2/3X1 = 8/8 = 1

X2 = 3X1

from BC : 8X1 + 8X2 = 400

Put, X2 = 3X1

8X1 + 24X1 = 400

32X1 = 400

X1' = 12.5

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