An individual only purchases two goods X and Y . The person has an income of...
An individual only purchases two goods X and Y . The person has an income of $100. The price of X is $2 per
unit and the price of Y is $4 per unit. The utility function of this individual is U = 3X +5Y . This means the person
has a constant marginal utility of 3 and 5 for goods X and Y , respectively. What bundle of goods X and Y should
the person buy to maximize utility. Why? (Answer: 50 units of X
and none of Y giving a utility of U = 150)
Please show all steps, and sketch the indifference curve and the
budget line representing the optimal bundle of goods.
Homework Answers
MRS = MUx/MUy = 3/5 = .6
Px/Py = 2/4 = .5
As MRS > Px/Py
IC is always steeper than budget line
MUx/Px > MUy/Py
Extra dollar spent on gives higher additional Utility, as compared to the, utility when extra dollar spending on Y
so Only X is consumed at eqm
X* = M/Px = 100/2 = 50
Y* = 0
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