Answer to Question #139908 in Microeconomics for Ryan Murray Finn

Question

John’s utility function is given by the following equation

𝑈(𝑥, 𝑦) = min(2𝑥, 5𝑦),

where x is the unit of good X consumed, and y is the unit of good Y consumed. John’s budget is $140, price of good X (𝑃𝑋) is $3, and price of good Y (𝑃𝑌) is $10. Show all the steps, with definition of every new notation used in the steps.

a) What is John’s optimal consumption (𝑥 ∗ , 𝑦 ∗ )? Graph the optimal consumption along with appropriate budget line and indifference curve.

b) If 𝑃𝑋 decreases from $3 to $2, what is the new optimal consumption (𝑥𝐹, 𝑦𝐹)? Graph the new optimal consumption along with appropriate budget line and indifference curve on part a)’s graph.

Answer 1

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