Suppose that John has the utility function u(x, y) = 3x^{\frac{1}{2}} + y. Suppose that the...


Suppose that John has the utility function {eq}u(x, y) = 3x^{\frac{1}{2}} + y {/eq}. Suppose that the budget equation is given by {eq}P_xx + P_yy = M {/eq}. Suppose that the price of a unit of {eq}x {/eq} is 1 and the price of a unit of {eq}y {/eq} is 2 and John's income is 8. Find how many units of {eq}x {/eq} and {eq}y {/eq} John chooses to consume.

Budget Constraint:

In economics, the budget constraint determines the set of consumption goods that are feasible. Among the set of feasible consumption bundles, the one that yields the highest total utility is the optimal bundle.

Answer and Explanation: 1

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The optimal consumption bundle is when the marginal rate of substitution is equal to the price ratio, i.e.,

  • {eq}\dfrac{MU_x}{MU_y} =...

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Utility Maximization: Budget Constraints & Consumer Choice


Chapter 3 / Lesson 2

Learn about utility maximization. Discover various types of utility, examine utility maximizing rules, and study examples of maximizing utilities in economics.

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