Answer to Question #262532 in Microeconomics for lucas

Question

 Assume a consumer has $40 to spend and for both products the marginal utilities are shown in the following table: Quantity MUA MUB 1 35 80 2 20 40 3 12 18 Assume that each product sells for $10 per unit. a) How many units of each product will the consumer purchase? b) Assume the price of product B rises to $20 per unit. How will this consumer allocate her budget now? c) If the prices of both products rise to $20 per unit, what will be the budget allocation

Answer 1

Solution:

A.). Utility quantity maximizing is where: MU_A/P_A = MU_B/P_B

Budget constraint: I = P_AA + P_BB

40 = 10A + 10B

40 = (10 $\times$ 2) + (10 $\times$ 2)

40 = 20 + 20

40 = 40

To maximize utility, the consumer will purchase two units of product A and two units of product B.

Product A = 2 units

Product B = 2 units

B.). The new budget constraint: 40 = 10A + 20B

To maximize utility, the consumer will now purchase two units of product A and 1 unit of product B.

Product A = 2 units

Product B = 1 unit

40 = 10A + 20B

40 = (10 $\times$ 2) + (20 $\times$ 1)

40 = 20 + 20

40 = 40

C.). New budget constraint = 40 = 20A + 20B

To maximize utility, the consumer will now purchase 1 unit of product A and 1 unit of product B.

Product A = 1 unit

Product B = 1 unit

40 = 20A + 20B

40 = (20 $\times$ 1) + (20 $\times$ 1)

40 = 20 + 20

40 = 40