Answer to Question #284827 in Macroeconomics for minma

Question

Consider a consumer whose utility function is given as: U (x, y) = xy, where x and y denote the quantities of goods x and y consumed. The budget constraint faced by the consumer is: 4x + 8y = 120, where 4 is the price of good x, 8 is the price of good y and 120 is the income of the consumer.

(a)From the utility function find the expression of the Marginal Rate of Substitution for our consumer. Find the typical equation of an Indifference Curve for our consumer.

b Find the optimal quantities for x and y consumed by the consumer. Show your solution diagrammatically. 

c Following on the answer in b, now assume that the price of good x increases to 8. Find the new quantities consumed by the consumer

dFind the Substitution and Income effects associated with the increase in the price of x. Show your results in a graph. Given your result, would you say that good x is a normal good? What about good y? 

Answer 1

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