Question

Given the following: u = z;25 * 0,75 тах 21 > 0, x2 > 0 s.t. P1 * x1 +P2 * x2 <I • The marginal utility of good 1: MU1 = .25 * • The marginal utility of good 2: MU2 = .75 * " • Baseline Scenario: pi = 8, P2 = 4 and I = 400 • New Scenario: pi = 8, P2 = 8 and I = 400

Answer 1

Question 1) option E, F)

At eqm, MRS = P1/P2

MU1/MU2 = MRS = X2/3X1

At eqm, X2/3X1 = P1/P2

X2*P2 = 3X1*P1

From BC : P1X1 + P2X2 = I

X1* = I/4P1, X2* = 3I/4P2

As P2 rises, so Quantity demanded of good 2 falls

X1* = 400/4*8 = 100/8

X2* = 3*400/4*4 = 75

.

after price rise

X1' = 400/4*8 = 100/8

X2' = 3*400/8*4 = 37.5

So no change in Quantity demanded of good 1

& No change in demand for good 1

Question 2) option D)

two goods are not related ,

Bcoz as price of one good changes, quantity demanded of other good is unchanged