Question

. Yamoah has an income (M) ofGH¢200 to spend on two commodities Maize and Yam. 

Maize costs GH¢ 1.20 per unit and Yam costs GH¢ 1.1 0 per unit. 

(a) 

Write down Mrs. Yamoah's budget equation. 

(b) 

Write down Mrs. Yamoah's budget line. 

(c) 

What is Mrs. Yamoah's Marginal Rate of Substitution of Maize to Yam? 

Answer 1

Solution:

a.). Yamoah’s budget equation:

M = PxX + PyY

Where: M = Income = 200

            Px = Price of Maize = 1.20

            Py = Price of Yam = 1.10

b.). Budget line: 200 = 1.20X + 1.10Y

 

c.). MRS_x,y = $\frac{MU_{x}}{MU_{y}}$

$\frac{MU_{x}}{P_{x}} = \frac{MU_{y}}{P_{y}}$

 

MU_x = $\frac{\partial U} {\partial x} = \frac{1.20} {x}$

 

MU_y = $\frac{\partial U} {\partial y} = \frac{1.10} {y}$

 

MRS_x,y = $\frac{\partial U} {\partial x} = \frac{1.20} {x}$

MRS_x,y = $\frac{\partial U} {\partial y} = \frac{1.10} {x}$

MRS_x,y = $\frac{1.09y} { x}$