Alvin gains marginal utility as shown at various quantities of goods X and Y. B.

Question

Alvin gains marginal utility as shown at various quantities of goods X and Y.

B. Give the quantities of X and Y Alvin would purchase to maximize utility, then give the total utility Alvin receives from this bundle.

C. Suppose that the price of X falls to $8 while the price of Y remains at $6 and income remains at $90. List the numbers that complete the second MU/Price column for good X.

D. Give the quantities of X and Y Alvin would purchase to maximize utility. Then give the total utility Alvin receives from this bundle.

Explanation / Answer

A. (Pay attention to column headers) (MUx/Px)a 15.33 13.33 10.83 7.92 6 2.67 1.33 .58 (MUy/Py) 10 9 8 7 6 5 4 3 B. The point at which utility is maximized is where marginal utility of the different goods is equal. In other words, it is the point at which the consumer is indifferent between the two goods (More accurately, it is the point at which the indifference curve is tangent to the budget constraint. Use this if you're in an intro class and want to look smart haha). In this case, the utility is maximized at 5 units of X and 5 units of Y (also note that at this point, total expenditure equals $90). C. (MUx/Px)b 23 20 16.25 11.88 8 4 2 0.88 D. In this case utility would be maximized at X = 4 and Y = 3. Although 7 units of X and 6 units of Y would provide more utility, this point is unattainable because it does not intersect with the budget constraint. [ ($8 * 7) + ($6 * 6) = $92 ]

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