1. If an individual’s preferences are described by the utility function U(X1 , X2 ) = X12 + X22,
a) graph the indifference curve for U = 20 and U= 40.
b) Find the optimal consumption quantities if P1 = US$2.50 ; P2 = US$ 7.50; and M = US$ 60.
Part a
U(X1 , X2 ) = X12 + X22
The indifference curve is as shown below
If , the budget line will be as follows
Also from U(X1 , X2 ) = X12 + X22
as
So,
Part b
Equating the slope of budget line and MRs
Therefore,
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