Question

(10 points) Wendy's utility over consumption bundles (x1, x2) is given by u(x1,x2) = VX1 + 21X2. If the price of good 1 is $2/unit, the price of good 2 is $1/unit and income is $120, what is Wendy's optimal consumption of Good 2? (You can use the 5 step method to solve this problem). (10 points) When u(x1, x2) = min ), at prices and income P1, P2, and I, demand for good 1 is given by xi (P1, P2, 1) = -bune Given this information, which of the following statements is true? a. Goods 1 and 2 must both be normal goods and Good 2 is a complement for Good 1. b. Good 1 is normal, but good 2 may be normal or inferior. C. Goods 1 and 2 must both be normal goods and Good 2 is a substitute for Good 1. d. None of the above statements are true.

Answer 1

Budget constraint For Wendy's be . Piast P2 X 2 = M. 5 22 = 1207 - 0 The optimal condition be MRS = MU musē or MUL =P MUL ) 19 h the I VX4 - 112 = 16x1) Put 22 = 16e, in equr ☺ we get 291 + 1680 = 120 » 197 = 6.67) : 8=1687 3172 = 1616.67) => [23 = 106.727 consumption of Good a he q = 106.72 2 V, 107 So optional

- Option A Good I and 2 must both be Normal goods and Good 2 is a Complement for Good I is correct-option Because a * (P, , P , I) = al - apith P2 Sa s o mean positive Relation b/w income and good to demand which reced to Normal Good imitalu Pet (fB , I J = b I apitbly sofhinal Bundle I Shoo s tve Relation b/w income and good 2. (22) n budget line