Problem #1 Assume that an individual consumes two goods, X and Y . The total uti
ID: 1231230 • Letter: P
Question
Problem #1
Assume that an individual consumes two goods, X and Y. The total utility (assumed measurable) of each good is independent of the rate of consumption of other good.
The price of X and Y are respectively $40 and $60. Use the following table of total utilities to answer the following questions.
Good
Total Utility of X
Total Utility of Y
1
20
45
2
38
78
3
54
108
4
68
135
5
80
159
6
90
180
e. If the consumer has $420 to spend, ______ unit of X and _______ units of Y maximize utility subject to the budget constraint. Explain.
Good
Total Utility of X
Total Utility of Y
1
20
45
2
38
78
3
54
108
4
68
135
5
80
159
6
90
180
Explanation / Answer
Spending as much of our cash as possible... Our options are: 1) 6 units of x 4 units of y total utility: 90+135=225 2) 5 units of x, 4 units of y (just worse then 1) 3) 4 units of x, 5 units of y total utility: 68+159= 227 4) 3 units of x, 6 units of y total utility: 54+180=234 So our best option is #4, with 3 units of x, 6 units of y
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