a)At these prices, Roy maximizes his utility subject to his budget constraint by

Question

a)At these prices, Roy maximizes his utility subject to his budget constraint by consuming 4 units of x1 and 8 units of x2

Now suppose after the price increase, Roy consumes 5 units of x1 and 5 units of x2. Without knowing Roy’s utility function, is it possible to determine how much income we must give Roy so he attains the same utility as (a)? If yes, calculate the amount. If no, explain why not.

Question 5 (55 points total) Roy gets utility from two goods x1 and x2 and has well-behaved preferences which exhibit diminishing MRS. Roy's income is $40 and he faces prices pi- $2 and p2 $4

Explanation / Answer

It is not possible to calculate the income given to Roy without knowing his utility function.

Utility function specifies :

Price * Number of units of x1 + Price * Number of units of x2 = Total Income

As the price per unit of each of the commodities is not given after price increase, the Total Income cannot be calculated.

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