Use the following two utility functions for two different people, identified by the subscripts on U,...

Use the following two utility functions for two different people, identified by the subscripts on U, to answer all the following questions. The values for x and y might be different for the two people.

U₁(x,y) = x^0.5y^0.5; U₂(x,y) = x ^0.5 + y ^0.5

Would these two people have an incentive to trade x and y? Yes ___ No ___

b. Is there some set of prices p_X and p_Y such that person 1 would consume only one of the goods? Assume each maximum price is less than the total budget I. Yes ___ No ___

Expert Solution

a. No these two people have no incentive to trade X and Y

b. For the persona 1 the utility function refers that X and Y are perfect complement for person 1 thus when each maximum price is less than the total budget person 1 will consume atleast minimum of both goods thus it is not possible for him to consume only one for for a some set of prices.

Rahul Sunny answered 2 years ago

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