Question

1. Suppose the consumer’s budget (B1) is P50.00 and the price per unit of Good X (Px1) is P10.00 and the price per unit of Good Y (Py1) is P5.00. How many units of goods X and Y the consumer should buy in order to be an equilibrium? How many will be the consumer’s total utility from this combination of goods X and Y?

Answer 1

Budget constraint:$I = P_{x}X + P_{y}Y$

50 = 10X + 5Y

At equilibrium;$P_{x}X=P_{y}Y$

Let $P_{x}X$ be X; At equilibrium 2X=50.

$\therefore X=25$

$10X=25$

$X=2.5$

$5Y=25$

$Y=5$

The total utility from combination of goods X and Y, will be the summation of utilities of X and Utilities of Y at 2.5 and 5 respectively;

$\sum^{2.5}_{1}U(X)+\sum^5_1U(Y)$