The table below gives an individual\'s marginal utility schedule for good X and
ID: 2507427 • Letter: T
Question
The table below gives an individual's marginal utility schedule for good X and good Y. Suppose that X and Y are the only goods available, the price of X and the price of Y are $1 and the individual's income is $8 per time period and is all spent.
Indicate how this individual should spend his/her income in order to maximize total utility. Justify your answer.
What is the total amount of utility received by the individual when in equilibrium? Justify your answer.
State mathematically the equilibrium condition for this individual.
A perpetuity is a bond that pays an amount per year forever. If a perpetuity pays $5 per year:
(a) what would the annual interest rate be if an investor paid a $50 perpetuity?
(b) what would be the annual interest rate if an investor paid $200? $600? Bonds are known as "fixed income" securities because the future payments that they will make to investors are fixed by the bond agreement in advance.
Explanation / Answer
Sinve MUy is always greater than Mux all should be spent on y since they are the same price.
100 since the person can consume 8 y with $8.
Mux/Px= Muy/Py (the ratios of the utilities to the prices should be the same.
5/50= 10%
5/200= 2.5%
5/600= 0.833%
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