Andy purchases only two goods, apples (a) and kumquats (k). He has an income of $40...
Andy purchases only two goods, apples (a) and kumquats (k). He has an income of $40 and can buy apples at $4 per pound and kumquats at $2 per pound.
the utility function is U(a,k)=5a+3k
What bundle of apples and kumquats should andy buy to maximize his utility?
_ lbs of apples
_ lbs of kumquats
Homework Answers
U = 5a+3k
This is the perfect substitute utility function.
If he spend $4 on apples , then he gets 1 unit of apple and his utility will increase by 5 units.
If he spends $4 on kumquats, then he gets 2 units of apples and his utility will increase by 6 units.
Since he is getting higher utility by spending the same amount on kumquats so he should buy only kumquats and 0 units of apples.
So, his utility will be maximized if he buys
0 lbs of apples
20 lbs of kumquats (40/2)
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