Part 6 7 I need in words Not handwritten solution David’s utility function for good X and Y is given by U (x, y) = x2 y3 . Where Px, Py and I are the price of good X, price of good Y and consumer income respectively. i. Write the budget equation of the consumer and draw the line of this equation. ii. Using the budget line drawn in (i) show the effect of a 100 percent increase in the price of good X hold the price of good Y and income constant. iii. Using the budget line drawn in (i) show the effect of a 100 percent increase in his income holding the price of both goods constant. iv. What combination of X and Y maximizes the consumer’s utility at I=100, Px = 4 and Py = 5. v. Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your results vi. Suppose all prices double and income is held constant, what is the effect of this on the optimal combination of X and Y? vii. What happens to the optimal combination of X and Y if price of good X decreases to 2 whiles the price of good Y and income remain unchanged
Part 6 7 I need in words Not handwritten solution David’s utility function for good X and Y is given by U (x, y) = x2 y3 . Where Px, Py and I are the price of good X, price of good Y and consumer income respectively. i. Write the budget equation of the consumer and draw the line of this equation. ii. Using the budget line drawn in (i) show the effect of a 100 percent increase in the price of good X hold the price of good Y and income constant. iii. Using the budget line drawn in (i) show the effect of a 100 percent increase in his income holding the price of both goods constant. iv. What combination of X and Y maximizes the consumer’s utility at I=100, Px = 4 and Py = 5. v. Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your results vi. Suppose all prices double and income is held constant, what is the effect of this on the optimal combination of X and Y? vii. What happens to the optimal combination of X and Y if price of good X decreases to 2 whiles the price of good Y and income remain unchanged
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 8P
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Part 6 7
I need in words
Not handwritten solution
David’s utility function for good X and Y is given by U (x, y) = x2 y3 . Where Px, Py and I are the price of good X, price of good Y and consumer income respectively.
i. Write the budget equation of the consumer and draw the line of this equation.
ii. Using the budget line drawn in (i) show the effect of a 100 percent increase in the price of good X hold the price of good Y and income constant.
iii. Using the budget line drawn in (i) show the effect of a 100 percent increase in his income holding the price of both goods constant.
iv. What combination of X and Y maximizes the consumer’s utility at I=100, Px = 4 and Py = 5.
v. Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your results
vi. Suppose all prices double and income is held constant, what is the effect of this on the optimal combination of X and Y?
vii. What happens to the optimal combination of X and Y if price of good X decreases to 2 whiles the price of good Y and income remain unchanged?
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