Suppose the utility function is U x 1 3 y 1 3 . Price of x is $2 and price of y is $5. Let the...
Question:
Suppose the utility function is {eq}U = x^{1/3} y^{1/3} {/eq} . Price of x is $2 and price of y is $5. Let the income be $50. Please derive the optimal quantity of x and y demanded.
{eq}Ux=U/3x \ and \ Uy=2U/3y {/eq}
Now if price of x becomes $5. Derive the new optimal quantity of x and y demanded.
What is the price effect on good x?
Utility
Utility is the measurement of an individual's satisfaction obtained from consuming a good or service. The utility function calculates the total satisfaction obtained from a combination of goods and services.
Answer and Explanation: 1
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View this answerGiven the marginal utilities of x and y, you can calculate the marginal rate of substitution, {eq}MRS = MUx/MUy {/eq} as
{eq}MRS =\frac{U/3x} {U/3y}...
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