In: Economics
Question 1) Charlie's utility is U(x1, x2) = 4x^1/2+x2. If the price of nuts (good 1) is $1, the price of berries (good 2) is $4, and his income is $132, how many units of nuts will Charlie choose?
A. 128
B. 32
C. 67
D. 64
E. 17
Question 2) Kyle's utility function is U(A, B) = AB, where A and B are the numbers of apples and bananas, respectively, that he consumes. If Kyle is consuming 15 apples and 30 bananas, then if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indifference curve at his current consumption is
A. -2
B. -16
C. -1/2
D. -4
E. -1/4
1. The correct option would be
The utility function is given as
. The budget constraint is given as
or
. The optimal solution is where slope of budget line is equal to
slope of indifference curve.
The slope of indifference curve (in absolute terms) or MRS
(marginal rate of substitution) would be as
or
or
or
. The slope of budget line (in absolute terms)
would be as
. The optimal combination of goods would be where
or
or
or
or
or
units.
The optimal amount of good 2 would be hence
or
or
or
units.
2. The correct option would be
The utility function is
. The slope of indifference curve would be as
or
. For B=30 and A=15, we have
or
.
For
, we have the slope of indifference curve as
or
or
, and for a constant utility level, we have
or
or
.