Question

4. Suppose Michelle's tastes for haircuts (x1) and spending on other goods (x2) per year can be represented by the separable utility function u(xı,x2) 600x1% +2x2. (3 marks) (a) Derive an expression for Michelle's marginal rate of substitution (MRS). (b) Derive expressions for Michelle's optimal bundle of xi and x2 by simply using the fact that, at any interior solution, MRS--pi/pz. (4 marks) (c) What slope does Michelle's demand curve for haircuts have (e.g. downward-sloping, upward-sloping, horizontal, vertical)? (2 marks) (d) Suppose haircuts cost $50 each and Michelle's income is $80,000, how many haircuts (xi) does Michelle consum (2 marks) (3 marks) How much money does Michelle spend on other goods (x2)? (e)

Answer 1

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