Suppose the utility function for an individual is given by u(x, y) = x + y, where x and y are two...


Suppose the utility function for an individual is given by {eq}u(x, y) = x + y {/eq}, where {eq}x {/eq} and {eq}y {/eq} are two goods. The budget constraint of an individual is {eq}2x + 5y = 10 {/eq}, where {eq}I = 10 {/eq} is the income of an individual, {eq}P_x = 2 {/eq} - the price of good {eq}x {/eq}, and {eq}P_y = 5 {/eq} - the price of good {eq}y {/eq}. Suppose the individual wants to make {eq}u(x, y) {/eq} as high as possible.

A. What would be the demand for {eq}x {/eq}?

B. Suppose the price for {eq}y {/eq} is now 1, i.e. {eq}P_y = 1 {/eq}. What would the total demand for {eq}x {/eq} be? What can be said about {eq}x {/eq} and {eq}y {/eq}?

Substitute Goods:

The types of goods that can be used in place of each other are known as substitute goods. The substitute goods have a direct relationship between each other. In other words, if the price of one good increase, the quantity demanded of the other good also increases.

Answer and Explanation: 1

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{eq}\begin{align*} u\left( {x,y} \right) &= x + y\\ 2x + 5y &= 10 \end{align*} {/eq}

A) The utility function is perfect substitutes...

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Substitute Goods: Definition & Examples


Chapter 8 / Lesson 13

Understand what substitute goods are by learning the substitute goods definition. Discover some examples of substitute products. Understand the substitution effect.

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