u(x1, x2) = min {x1/2, x2/3} if the price of good 1 is $7/unit, the price...

u(x1, x2) = min {x1/2, x2/3}

if the price of good 1 is $7/unit, the price of good 2 is $4/unit and income is 114..

What is this person's optimal consumption level for good 2?

Solutions

Expert Solution

u(x1, x2) = min{x1/2, x2/3}

At optimal consumption bundle, the condition is:

x1/2 = x2/3

3x1 = 2x2

x1 = (2/3)x2

The additional information provided is:

Px1 = 7

Px2 = 4

M = 114

The budget line is:

x1*Px1 + x2*Px2 = M

7x1 + 4x2 = 114

7(2/3)x2 + 4x2 = 114

(14/3)x2 + 4x2 = 114

(26/3)x2 = 114

x2 = 114*3/26

x2 = 13.15385

Hence, the person's optimal consumption level for good 2 is 13.15385

Hence, the correct answer is 13.15385

Rahul Sunny answered 1 year ago

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