Question

QUESTION 11 Scenario 1: Tom's budget constraint is given by PxX +PyY = 40, and Px= $5, Py = $4. Suppose Tom's utility function is given by the equation U= 2XY, where is the level of utility measured in utils and X and Y refert good X and good Y, respectively. You are also told that the marginal utility of good X can be expressed as MUX = 2Y; and the marginal utility of good Y can be expressed as MUY =2X. a. Refer to Scenario 1. What are the X and Y in the market basket (X,Y) that maximize Tom's utility given his budget constraint? b. Refer to [a]. What is the marginal rate of substitution of X for Y at the utility-maxiinizing market basket (X,Y)? c. Refer to Scenario 1. How does your answer to [a] change if the price of good X doubles? d. Extra Credit (5 points): Refer to Scenario 1. Can you identify a utility function for which the chosen bundle would not change regardless of the price of X? TTT Arial 3 (12pt) TEE-SP2's Qis Path:p Words:0

Answer 1

U-2xy MUx=24 Muy-2x MRS = MUX Muy Budget 5x+4y=40 At optimality 15x=47 = 21 put in Budget lox- 40 x=4 & 4 = Sty- MRS= Px1Py= [At optimality] If price of a doubles then c) -2 & Y=5 d) ulx, y) = min [x, y]