Suppose that you know the utility function for an individual is given by the equation U= XY where...


Suppose that you know the utility function for an individual is given by the equation U= XY where U is the total amount of utility the in and good Y. You are also told that this individual's income is $100 and that the price of good X is $2 and the price of good Y is $4. From this information answer the following set of questions.

(a) What is the consumption bundle of good X and good Y that maximizes this individual's utility given their income, prices of the two goods, and their tastes and preferences as measured by their utility function? Support your answer with a well labelled diagram Hint: e.g. Mux = dU/dX) (b) What is the level of utility this individual gets when they maximize their utility given the above information? (c) Suppose that the price of good X increases to $4 and nothing else changes. What is the new consumption bundle that maximizes the individual's utility no the price of good X has increased? What has happened to his utility? Determine the SE and IE .

utility Maximization:

Utility maximization refers to the objective of a rational consumer to derive the maximum possible satisfaction from the consumption of a bundle of goods under the constraint of a budget defined by the income of the consumer.

Answer and Explanation: 1

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Utility Function:

{eq}U = XY {/eq}

Budget Constraint:

{eq}$100 = 2X + 4Y {/eq}

Ans. (a)

The utility is maximized at the point where the...

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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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