Question

Suppose a consumer consuming two commodities X and Y has the following utility function X0.4 Y0.6. If price of good X and Y are 2 and 3 respectively and income constraints birr 50.

A/ Find the quantities of X and Y which Maximize utility

B/ Find the MRSxy

C/ What are the maximum utility drived from consuming of the two commodities?

Answer 1

Utility functions U; X=0.4, Y=0.6 and prices P are 2 and 3 respectively. The income is 50

A. The quantity Q that of x and y that maximize utility is given by;

$Qx = Ux*Px$ =0.4*2 =0.8

$Qy = Uy*Py$ =0.6*3 =1.8

B. $MRSxy =Px/Py$

MRSxy =2/3 =0.67

C. Maximum utility=0.8/0.67 +1.8/0.67=2.27