Problem #1 Assume that an individual consumes two goods, X and Y . The total uti
ID: 1231232 • 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
g. If the consumer wanted 4 units of X and 6 units of Y what would have to be his/her budget constraint in order to maximize his/her utility? 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
So we know his maximum utility is 4,6 with 248 utility so we want to eliminate all possible ways of getting more then that. Now he must have at least 4(40)+6(60)=$520 to buy the goods he's getting. what are the ways of having more utility? 1) 5 units of x, 6 units of y: total cost, 560 2) 6 units of x, 5 units of y: total cost, 540 (the other options are either less utility, or is 6,6 which just costs more) So if he had $540 or more, he could have gone with option 2 and gotten more utility, so we know that he must have less then $540. So he can have anywhere between $520-$539.
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